Federal Estate Tax

[Joylush]

How does this work? If your estate will owe federal estate taxes are the people who are the beneficiaries to your accounts responsible for paying the taxes out of the amounts they inherit?

I understand if the estate owns property that property may have to be sold to pay the taxes due. But what if all assets were typical retirement, savings and investment accounts with named beneficiaries? How do they prevent the beneficiaries from taking the money and spending it before the amount due is known?

Or are the beneficiaries prevented from accessing the accounts they inherit until after the estate has been settled to determine the amount that needs to be withheld to pay the taxes due?

From what I can determine if you are the beneficiary of a deceased account you need only prove the death to the financial institution and the account becomes yours. Would the estate then have to demand payment from the beneficiary to cover the taxes that are eventually determined to be owed by the estate?

 

[OldShooter]

WADR, if you have enough money that you are worried about Federal estate tax, you have enough money to consult an attorney or CPA to get accurate information. SGOTI is not a reliable tax advisor.

 

[pb4uski]

I think that it would be rare that an estate exceeding the exemption would be all or mostly beneficiary designations, but I guess that it is possible.

Not sure how it would work, but I'm very sure that the feds would find a way to get their due.

 

[Dash man]

It’s the responsibility of both the estate and the beneficiaries to make sure it’s paid. They will claw back any funds if needed to pay.

 

[audreyh1]

It’s the responsibility of both the estate and the beneficiaries to make sure it’s paid. They will claw back any funds if needed to pay.

Exactly, if all accounts are set up as transfer on death to beneficiaries, and the value of the estate exceeds the Federal Estate Tax exemption, there will be claw back.

 

[PaunchyPirate]

I don’t want to derail the OPs original question about the federal estate tax, but I am in a situation where I need to think about taking action regarding Pennsylvania’s Inheritance Tax, which operates in a similar manner. However it does not have the high threshold of excuded income that the federal estate tax has.

I am single with no children. My will and financial accounts spread my estate assets out to 10 nieces and nephews and 3 brothers.

My brothers’ inheritance is subject to a 12% tax. My nieces/nephews’ inheritance is subject to 15% tax. This tax applies to all the major asset types (homes, cash, brokerage accounts, IRAs, etc.). The executor must file the paperwork (with payment) with my county government office within 9 months of death, but can get a discount if filed within 3 months.

The state’s website does not articulate how an executor is to come up with the money. So I assume I’m in the same situation as the OP.

In my case, up until December I had named beneficiaries set up for both my IRA and my brokerage account. I changed this in December so that only my IRA account has named beneficiaries. That way, the nieces and nephews can get their money quickly from their share of the IRA. But my larger brokerage account will go to the estate. There is plenty of money in it to cover the entire inheritance tax. The executor can pay the tax and then distribute the remaining money per my will.

My problem is that my will currently does the split differently than I would like for that sum of money. So I will be making an appointment with my attorney to alter the terms of my will slightly in the near future. When we wrote the will, my attorney didn’t explain the ramifications of the inheritance tax very well. And I didn’t ask the right questions.

 

[Joylush]

I don’t want to derail the OPs original question about the federal estate tax, but I am in a situation where I need to think about taking action regarding Pennsylvania’s Inheritance Tax, which operates in a similar manner. However it does not have the high threshold of excuded income that the federal estate tax has.

I am single with no children. My will and financial accounts spread my estate assets out to 10 nieces and nephews and 3 brothers.

My brothers’ inheritance is subject to a 12% tax. My nieces/nephews’ inheritance is subject to 15% tax. This tax applies to all the major asset types (homes, cash, brokerage accounts, IRAs, etc.). The executor must file the paperwork (with payment) with my county government office within 9 months of death, but can get a discount if filed within 3 months.

The state’s website does not articulate how an executor is to come up with the money. So I assume I’m in the same situation as the OP.

In my case, up until December I had named beneficiaries set up for both my IRA and my brokerage account. I changed this in December so that only my IRA account has named beneficiaries. That way, the nieces and nephews can get their money quickly from their share of the IRA. But my larger brokerage account will go to the estate. There is plenty of money in it to cover the entire inheritance tax. The executor can pay the tax and then distribute the remaining money per my will.

My problem is that my will currently does the split differently than I would like for that sum of money. So I will be making an appointment with my attorney to alter the terms of my will slightly in the near future. When we wrote the will, my attorney didn’t explain the ramifications of the inheritance tax very well. And I didn’t ask the right questions.

Exactly. I will eventually have to pay for some estate planning and can get questions answered then. But I like having a good understanding of things before going that route. I’ve often found I have more knowledge of things from financial planning to proper sizing of air conditioning than the professed professionals do so it helps me to ascertain if the person I’m hiring knows their stuff or not.

My other half is from Pennsylvania and I once looked into getting some property there. Once I learned of their awful tax policies to include their inheritance tax structure I decided to avoid that state at all costs as far as any sort of residency goes. They really get you, even if your estate is virtually nothing.

 

[Souschef]

I had no choice. I had to handle my MIL's estate in PA. Unfortunately, she had attorney do the paperwork.
Since I lived in CA, if it was up to me, I would tell them to shove it. We got all her funds in checks, and we could cash them in CA.

 

[Sunset]

It’s the responsibility of both the estate and the beneficiaries to make sure it’s paid. They will claw back any funds if needed to pay.

Yes, some time ago I asked the same question as OP in a thread about inheritance.
So if you have a giant pile of $$$, open a bank account/stock account without any beneficiaries (or name estate as beneficiary) and put enough in it to cover the tax, etc.
That way the beneficiaries won't have to go on the run , and the executor won't have to beg beneficiaries to pay

It's not just the taxes, if absolutely everything was POD, the executor would have immense trouble paying for the funeral, property taxes and all the other minor expenses before the estate is closed, including the final tax return payment.

 

[N02L84ER]

Or you could start gifting the excess to the beneficiaries or charities now.

 

[audreyh1]

I don’t want to derail the OPs original question about the federal estate tax, but I am in a situation where I need to think about taking action regarding Pennsylvania’s Inheritance Tax, which operates in a similar manner. However it does not have the high threshold of excuded income that the federal estate tax has.

I am single with no children. My will and financial accounts spread my estate assets out to 10 nieces and nephews and 3 brothers.

My brothers’ inheritance is subject to a 12% tax. My nieces/nephews’ inheritance is subject to 15% tax. This tax applies to all the major asset types (homes, cash, brokerage accounts, IRAs, etc.). The executor must file the paperwork (with payment) with my county government office within 9 months of death, but can get a discount if filed within 3 months.

The state’s website does not articulate how an executor is to come up with the money. So I assume I’m in the same situation as the OP.

In my case, up until December I had named beneficiaries set up for both my IRA and my brokerage account. I changed this in December so that only my IRA account has named beneficiaries. That way, the nieces and nephews can get their money quickly from their share of the IRA. But my larger brokerage account will go to the estate. There is plenty of money in it to cover the entire inheritance tax. The executor can pay the tax and then distribute the remaining money per my will.

My problem is that my will currently does the split differently than I would like for that sum of money. So I will be making an appointment with my attorney to alter the terms of my will slightly in the near future. When we wrote the will, my attorney didn’t explain the ramifications of the inheritance tax very well. And I didn’t ask the right questions.

My understanding is that the inheritors who are residents of PA pay their inheritance tax out of what they receive.

 

[PaunchyPirate]

My understanding is that the inheritors who are residents of PA pay their inheritance tax out of what they receive.

I don’t believe that is correct. One inheritance tax form is filed by the executor. On that form, a calculation is done that splits out the amounts to be captured based on the various categories of relationship of the beneficiaries. So the amount paid will vary based on the specific relationships of the beneficiaries, but it’s collected and paid by one person, the executor. Unless I’m not understanding something correctly.

 

[Dash man]

I don’t believe that is correct. One inheritance tax form is filed by the executor. On that form, a calculation is done that splits out the amounts to be captured based on the various categories of relationship of the beneficiaries. So the amount paid will vary based on the specific relationships of the beneficiaries, but it’s collected and paid by one person, the executor. Unless I’m not understanding something correctly.

From: https://www.revenue.pa.gov/News and...xCompendium/Documents/2021_tax_compendium.pdf

“The personal representative of the decedent’s estate or the transferee pays Inheritance and Estate Taxes using proceeds from the estate. The local Register of Wills acts as the commonwealth’s agent in the collection of these taxes.”

 

[audreyh1]

I don’t believe that is correct. One inheritance tax form is filed by the executor. On that form, a calculation is done that splits out the amounts to be captured based on the various categories of relationship of the beneficiaries. So the amount paid will vary based on the specific relationships of the beneficiaries, but it’s collected and paid by one person, the executor. Unless I’m not understanding something correctly.

Thanks.

 

[EastWest Gal]

That is correct. My dad moved to PA five years before he passed away. He was in failing health and I couldn’t give up my work to take care of him. As executor I was responsible for taking care of the PA inheritance tax, the bulk of which was paid within 90 days, which discounted the amount. It was 4.5% as my sister and I inherited. I had sold my dad’s house when he moved into assisted living and used the funds for his inheritance tax in addition to his living expenses.

It’s much more if the estate goes to siblings, nieces and nephews.

In PA, IRA distributions and SS is not taxed, and we have a low flat income tax. After age 59.5, my inherited IRA distributions and Roth conversions are not taxed at all at the state level. A $100K Roth conversion is not subject to PA state tax but if I were in California I’d be in the 9.3% bracket considering my dividend income on top of that.

 

[PaunchyPirate]

From: https://www.revenue.pa.gov/News and...xCompendium/Documents/2021_tax_compendium.pdf

“The personal representative of the decedent’s estate or the transferee pays Inheritance and Estate Taxes using proceeds from the estate. The local Register of Wills acts as the commonwealth’s agent in the collection of these taxes.”

Thanks for finding this. It sounds like I was wrong then. In my case, having 14 people have to file that form and make payment could be challenging for my executor to coordinate, although maybe it's not their worry once the money is distributed. Anyway, it's still something I want to get cleared up and simplified for my executor.

 

[Winemaker]

My understanding is that the inheritors who are residents of PA pay their inheritance tax out of what they receive.

+100

I am proceeding through this process now in PA. However, DM's will designates that her estate will pay any inheritance taxes.

 

[donheff]

Now I have to go out and re-evaluate. I thought the state estate tax was paid to the state in which the dead guy lived. Am I to understand that it is based on the state(s) where the beneficiaries live? Or worse, that the decedent's state takes a whack of the full estate and then the beneficiaries' states pile on with their own taxes?

Edit: I just asked Dr. Google and it looks like the later is the answer - yikes. Still no immediate worry but with enough time and growth could get close (not at Fed level). I will have to caution the kids not to move to PA.

 

[Dash man]

Now I have to go out and re-evaluate. I thought the state estate tax was paid to the state in which the dead guy lived. Am I to understand that it is based on the state(s) where the beneficiaries live? Or worse, that the decedent's state takes a whack of the full estate and then the beneficiaries' states pile on with their own taxes?

Edit: I just asked Dr. Google and it looks like the later is the answer - yikes. Still no immediate worry but with enough time and growth could get close (not at Fed level). I will have to caution the kids not to move to PA.

From: https://www.revenue.pa.gov/Formsand...ividuals/InheritanceTax/Documents/rev-584.pdf

“What property is subject to inheritance tax?
All real and tangible personal property of a PA resident decedent, including but not limited to cash, oil and gas rights, automobiles, furniture, antiques and jewelry located in Pennsylvania at the time of the decedent’s death, is taxable. All intangible property of a resident decedent, including stocks, bonds, bank accounts, loans receivable, etc., is also taxable, regardless of where it is located at the decedent’s death.
In the case of a nonresident decedent, all real and tangible personal property located in Pennsylvania at the decedent’s death is taxable. Intangible personal property of a nonresident decedent is not taxable.”

 

[donheff]

From: https://www.revenue.pa.gov/Formsand...ividuals/InheritanceTax/Documents/rev-584.pdf

“What property is subject to inheritance tax?
All real and tangible personal property of a PA resident decedent, including but not limited to cash, oil and gas rights, automobiles, furniture, antiques and jewelry located in Pennsylvania at the time of the decedent’s death, is taxable. All intangible property of a resident decedent, including stocks, bonds, bank accounts, loans receivable, etc., is also taxable, regardless of where it is located at the decedent’s death.
In the case of a nonresident decedent, all real and tangible personal property located in Pennsylvania at the decedent’s death is taxable. Intangible personal property of a nonresident decedent is not taxable.”

Thanks, not a big deal then.

 

[PaunchyPirate]

+100

I am proceeding through this process now in PA. However, DM's will designates that her estate will pay any inheritance taxes.

My will is also set up this way. However, if one doesn’t fund the estate adequately to cover the tax (such as allocating too much money out to direct beneficiaries at the broker level), then someone has to deal with getting that money back from the beneficiaries. Not fun, I’m sure. I’m in the process of changing things so the estate will be adequately funded.

 

[meierlde]

Yes, some time ago I asked the same question as OP in a thread about inheritance.
So if you have a giant pile of $$$, open a bank account/stock account without any beneficiaries (or name estate as beneficiary) and put enough in it to cover the tax, etc.
That way the beneficiaries won't have to go on the run , and the executor won't have to beg beneficiaries to pay

It's not just the taxes, if absolutely everything was POD, the executor would have immense trouble paying for the funeral, property taxes and all the other minor expenses before the estate is closed, including the final tax return payment.

Note for funerals a living person has to sign to assure payment to the funeral director and is thus responsible for paying the bill even if the estate is bankrupt.

 

[meierlde]

From: https://www.revenue.pa.gov/Formsand...ividuals/InheritanceTax/Documents/rev-584.pdf

“What property is subject to inheritance tax?
All real and tangible personal property of a PA resident decedent, including but not limited to cash, oil and gas rights, automobiles, furniture, antiques and jewelry located in Pennsylvania at the time of the decedent’s death, is taxable. All intangible property of a resident decedent, including stocks, bonds, bank accounts, loans receivable, etc., is also taxable, regardless of where it is located at the decedent’s death.
In the case of a nonresident decedent, all real and tangible personal property located in Pennsylvania at the decedent’s death is taxable. Intangible personal property of a nonresident decedent is not taxable.”

More generally if the decedent owns real property in other states than the one they live in a sub probate is required in each state to transfer the title. Actully this does suggest that real property other than that in the primary state should be held thru an llc or llp. Then it is the share that is inherited which is intangible property and not subject to multiple probates.

 

[SecondCor521]

Now I have to go out and re-evaluate. I thought the state estate tax was paid to the state in which the dead guy lived. Am I to understand that it is based on the state(s) where the beneficiaries live? Or worse, that the decedent's state takes a whack of the full estate and then the beneficiaries' states pile on with their own taxes?

Edit: I just asked Dr. Google and it looks like the later is the answer - yikes. Still no immediate worry but with enough time and growth could get close (not at Fed level). I will have to caution the kids not to move to PA.

My understanding:

There are federal estate taxes. Some states have state estate taxes. Estate taxes are assessed against the decedent's estate.

There can also be inheritance taxes. Inheritance taxes are assessed against the recipient. Some states have state inheritance taxes. There is currently no federal inheritance taxes.

It's not clear to me as to which laws apply if the decedent and the recipient live in different states. Even that could be state specific.

 

[audreyh1]

Note for funerals a living person has to sign to assure payment to the funeral director and is thus responsible for paying the bill even if the estate is bankrupt.

Unless the deceased had prepaid for funeral expenses which is what happened in DFs case. This made things so much easier. He also made burial/service wishes known outside the will.