Inheritance tax

[Refresher]

Anyone know about these state inheritance taxes.

Using an 11% tax a niece who inherits $100,000 over the small state exempt amount will owe $11,000.
Suppose the $100k consists of old savings bonds where principle is only $40k and interest is $60k. Will the niece still owe $11k or does the estate pay the taxes due on the $60k in interest (ie $15K) resulting in the niece inheriting $85k which 11% would be due on.

Or an IRA/401k where tax is due on the full amount lets use $300k.
Does the estate pay taxes on the $300k reducing the inherited amount to $225k that the 11% is due on? or tax the niece on the whole $300k.

Then some states also have an estate tax but I understand if the inheritance tax exceeds the estate tax no additional estate tax is due.

Any experiences or knowledge of this stuff?

 

[audreyh1]

Doesn't the estate pay the tax before anyone inherits?

State inheritance taxes depend very much on the state.

IRAs are different. There the heir has to draw from the IRA over some time period (like 5 years or lifetime if you are old enough) and withdrawals are taxed like ordinary income.

 

[smurray5991]

We are going through this now.


As Audreyh1 says, there is a difference between the estate (and/or inheritance) tax, and the tax that the heirs pay (as part of their personal returns.) The estate pays taxes on its total value prior to distribution of assets to the heirs.


So in the example above, the full value of the savings bonds at date of death would be included as part of the total estate value which is the basis for calculating federal and/or state estate tax. The niece doesn't pay this tax, the estate does in an estate tax return (federal and state). We are below the federal threshold so won't be taxed there at all, but our mother lived in NJ which has a very low estate value threshold which will be exceeded, so our bix estate tax hit will come there.


Following this, assets are distributed to heirs. If the heir in your examle (the niece) decides to then redeem the bonds or any other appreciated assets outside of an IRA, the value is 'stepped up' at the date of death, so she probably pays little or no tax on this redemption (just what is 'earned' since the DoD). (Taxes have already been paid from the estate for the total value of the estate -- it's irrelevant what portion was cost basis vs. appreciation).


As already noted, IRAs (and in some cases death benefit annuities), must be drawn down by the beneficiaries starting immediately and are taxed as ordinary income. In our case, my brother and I are taking inherited IRA RMDs based on our ages (we are 60 and 61); for the annuities, each one has different options for redemption -- we are taking one over 10 years of fixed payments, and the other within five years (at any amounts we choose, when we choose). Those distribution options were chosen to spread out income tax impact on each of us -- working within the limitations of what each company offered.


For any future redemptions of inherited non-retirement assets, we will use DoD value for cost basis purposes on our personal income tax returns.


Hope this helps from our experience.

 

[RE2Boys]

We are going through this now.





Following this, assets are distributed to heirs. If the heir in your examle (the niece) decides to then redeem the bonds or any other appreciated assets outside of an IRA, the value is 'stepped up' at the date of death, so she probably pays little or no tax on this redemption (just what is 'earned' since the DoD). (Taxes have already been paid from the estate for the total value of the estate -- it's irrelevant what portion was cost basis vs. appreciation).


.

Regarding US Savings Bonds, there is no automatic step-up in basis upon the death of the bond owner. They are not an appreciating asset, ie, you can't sell them and realize capital gains or losses.

If one inherits US Savings Bonds, federal taxes must be paid on all interest accrued from the date of issue. But there are options as to who pays those taxes.

There is an option whereby on the final return of the deceased owner, all interest accrued to date may be declared on the deceased final federal income tax return thus the heirs would only need to pay taxes on interest earned after the date of death. But this is an allowed OPTION. If this was not done, then the heir is on the hook to pay the taxes on ALL interest earned since date of issue.

 

[Sunset]

Regarding US Savings Bonds, there is no automatic step-up in basis upon the death of the bond owner. They are not an appreciating asset, ie, you can't sell them and realize capital gains or losses.

If one inherits US Savings Bonds, federal taxes must be paid on all interest accrued from the date of issue. But there are options as to who pays those taxes.

There is an option whereby on the final return of the deceased owner, all interest accrued to date may be declared on the deceased final federal income tax return thus the heirs would only need to pay taxes on interest earned after the date of death. But this is an allowed OPTION. If this was not done, then the heir is on the hook to pay the taxes on ALL interest earned since date of issue.

Wouldn't the estate cash in the savings bonds, pay the tax, and then from the pool of money split out the inheritance.
Do people actually state in a Will that "Johnny will get my Savings Bonds" ?

 

[GrayHare]

Wouldn't the estate cash in the savings bonds, pay the tax, and then from the pool of money split out the inheritance.
Do people actually state in a Will that "Johnny will get my Savings Bonds" ?

Redemption is not required by law. The estate's executor decides whether to redeem based on the directives of the decedent's will.

 

[GrayHare]

Or an IRA/401k where tax is due on the full amount lets use $300k.
Does the estate pay taxes on the $300k reducing the inherited amount to $225k that the 11% is due on? or tax the niece on the whole $300k.

Estate tax is wholly separate from taxes that apply to tIRA/t401k withdrawals. The estate valuation includes the value of the IRA/401k at date of death. The estate, not the inheritor, pays estate taxes. In addition, subsequent to retitling the tIRA/t401k to an inheritor (beneficiary), withdrawals are taxed as that inheritor's ordinary income.

 

[zinger1457]

Wouldn't the estate cash in the savings bonds, pay the tax, and then from the pool of money split out the inheritance.
Do people actually state in a Will that "Johnny will get my Savings Bonds" ?

I inherited a couple Savings Bonds from my mothers estate last year. The paper bonds were sent to TreasuryDirect and transferred and converted to electronic, it did take awhile almost 4 months. They mature in 2023 and continue to earn 4% so I will continue to hang onto them. Not sure if it was an option to cash in and have the estate pay the taxes. There was nothing in the will specific to Savings Bonds, just that the estate will be divided equally among the children.

 

[RE2Boys]

Wouldn't the estate cash in the savings bonds, pay the tax, and then from the pool of money split out the inheritance.
Do people actually state in a Will that "Johnny will get my Savings Bonds" ?

Hopefully any savings bonds are registered with a beneficiary designated. The worst tax rates are reserved for estates and trusts, you don't want to have income inside an estate and have the estate pay federal income taxes.
Yes, if no beneficiary named the estate could sell the bonds, distribute the income, and have the beneficiaries pay the tax via a K-1.

For 2016, estates hit the top income tax rate of 39.6% with income over $12,500. And that is in addition to any state inheritance tax the particular state may impose, which was the original subject of the thread.

 

[Sunset]

Redemption is not required by law. The estate's executor decides whether to redeem based on the directives of the decedent's will.

I can see where it could be financially smart to get the bonds transferred if they were paying high interest and had a long time left on them.

However, If you are in a State that charges the Estate a tax (ex WA at 20%). I'm wondering if this is calculated on the NET value of the estate, so if bonds had a lot of accumulated taxable income attached to them, then the estate cashes them, pays the income tax and has less "estate" to be taxed at 20%.

 

[RE2Boys]

I inherited a couple Savings Bonds from my mothers estate last year. The paper bonds were sent to TreasuryDirect and transferred and converted to electronic, it did take awhile almost 4 months. They mature in 2023 and continue to earn 4% so I will continue to hang onto them. Not sure if it was an option to cash in and have the estate pay the taxes. There was nothing in the will specific to Savings Bonds, just that the estate will be divided equally among the children.

Make sure you check with the executor if any of the accrued interest was reported and taxed on your mother's final federal income tax return, no point in having some portion of the interest taxed twice. Of course, whether to exercise this option depends on the relative tax rates of deceased versus the beneficiary.

My mother passed away in January so had very little income for her final tax year, we chose to have the accrued interest reported on her final tax return using up the zero tax bracket and a little of 10% bracket.

Sorry that this thread was hijacked into a discussion of how to report inherited savings bonds, I just tried to correct a mis-statement in post #3.

 

[GrayHare]

However, If you are in a State that charges the Estate a tax (ex WA at 20%). I'm wondering if this is calculated on the NET value of the estate, so if bonds had a lot of accumulated taxable income attached to them, then the estate cashes them, pays the income tax and has less "estate" to be taxed at 20%.

Redeeming (or not redeeming) Saving Bonds after the registered owner's death has no impact on estate tax. The value of the bonds for estate valuation purposes is set by the date of death of their registered owner.

If you mean redeeming before death and paying the tax on the accumulated interest, yes, that would reduce the value of the estate by the amount of tax. (A similar reduction in estate value can be had by converting tIRAs to Roth before death.)

Keep in mind some, if not all, of Saving Bond interest can be made non-taxable by deducting the decedent's final expenses against it. This capability is unique to Savings Bonds. To make it happen, provided the Will permits it, the executor can redeem some/all Savings Bonds shortly after the registered owner's death. The accumulated interest becomes income that appears on the decedent's estate's income tax return. That same return can list expenses of the estate, and deduct those expenses against the income. With careful balancing of amounts, the net effect is the bonds' interest income is not taxed. Note a decedent's estate's tax return is something separate from an estate tax filing.

 

[Refresher]

Redeeming (or not redeeming) Saving Bonds after the registered owner's death has no impact on estate tax. The value of the bonds for estate valuation purposes is set by the date of death of their registered owner.

If you mean redeeming before death and paying the tax on the accumulated interest, yes, that would reduce the value of the estate by the amount of tax. (A similar reduction in estate value can be had by converting tIRAs to Roth before death.)

g.

So regarding inheritance tax if the niece receives the 100k in bonds before redemption she owes 11% of the 100k. The estate cannot redeem them and pay the tax so the niece pays 11% on a lower amount?

What may happen if the bonds were registered deceased / or niece? Not pod. Can she claim full ownership after death?

 

[RE2Boys]

As stated in post #2, it very much depends on the state, would not touch a generalization.

 

[Refresher]

As stated in post #2, it very much depends on the state, would not touch a generalization.

Pa and NJ ?

 

[GrayHare]

So regarding inheritance tax if the niece receives the 100k in bonds before redemption she owes 11% of the 100k. The estate cannot redeem them and pay the tax so the niece pays 11% on a lower amount?

What may happen if the bonds were registered deceased / or niece? Not pod. Can she claim full ownership after death?

I regret I'm not sure of the options regarding state inheritance taxes.

 

[Sunset]

If I buy a Treasury bond and register it in someone's name, (like my own, or your name) then it belongs to the registered name, as only they can cash it.
It would have the registered persons SSN as well on it.

Bearer bonds are no longer sold by the Treasury

 

[RE2Boys]

Pa and NJ ?

The state inheritance tax is paid to the resident state of the decedent.

If the deceased was a PA resident, the PA rate for a niece inheriting savings bonds would be 15% of the full value of the savings bond (or any other property) on the date of death, less allowable estate expenses such as funeral and administrative costs.

The PA inheritance tax is usually filed for the entire estate by the personal representative of the deceased. The state can go after the beneficiaries if the tax is not paid.

I am not at all familiar with NJ inheritance tax.

 

[MRG]

The state inheritance tax is paid to the resident state of the decedent.

If the deceased was a PA resident, the PA rate for a niece inheriting savings bonds would be 15% of the full value of the savings bond (or any other property) on the date of death, less allowable estate expenses such as funeral and administrative costs.

The PA inheritance tax is usually filed for the entire estate by the personal representative of the deceased. The state can go after the beneficiaries if the tax is not paid.

I am not at all familiar with NJ inheritance tax.

+1

My DF lived in PA when he passed. He had a TOD set up to pass his investments to the heirs. As soon as the funds were distributed the State locked the receiving accounts! The lock stayed on for the six months the state took to find the check and validate the tax was paid. Most were new accounts that had been set up. Mine happened to be our brokerage account, I could trade all day long, couldn't withdrawal a dime of anything in the account(my portion of the inheritance was 30% of the account value). Yes PA. goes after the heirs!

 

[EastWest Gal]

Was the tax paid from the estate before the assets were transferred?

My DF passed in PA in 2009. I contacted his lawyer within a couple of days (small town lawyer, great guy). We went to the county clerk's office and obtained multiple copies of his death certificate, registered his will and got official copies from the recorder as well. Then I went to the bank and opened an estate checking account and moved the money from his checking account there. Out of that account, I paid the inheritance tax. I didn't even know about the state inheritance tax before he passed. It's supposed to be paid before the estate is distributed. If paid within 90 days there is 10% discount.

The inheritance tax is 0% for spouse, 4.5% for offspring, 12% for siblings, 15% for others.

It sounds like the transfers were made very quickly, before the tax was paid.

It also seems that savings bonds complicate matters.


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[Refresher]

Was the tax paid from the estate before the assets were transferred?

My DF passed in PA in 2009. I contacted his lawyer within a couple of days (small town lawyer, great guy). We went to the county clerk's office and obtained multiple copies of his death certificate, registered his will and got official copies from the recorder as well. Then I went to the bank and opened an estate checking account and moved the money from his checking account there. Out of that account, I paid the inheritance tax. I didn't even know about the state inheritance tax before he passed. It's supposed to be paid before the estate is distributed. If paid within 90 days there is 10% discount.

The inheritance tax is 0% for spouse, 4.5% for offspring, 12% for siblings, 15% for others.

It sounds like the transfers were made very quickly, before the tax was paid.

It also seems that savings bonds complicate matters.


Sent from my iPhone using Early Retirement Forum

4.5% for kids? Wow

 

[RE2Boys]

4.5% for kids? Wow

Should read "direct lineal descendents"

That would include adult children and grandchildren of deceased person.

I tell folks, unless extremely wealthy, to forget about federal "death" taxes but to watch out for PA Inheritance Tax.

 

[Refresher]

I tell folks, unless extremely wealthy, to forget about federal "death" taxes but to watch out for PA Inheritance Tax.

Any preventative advice offered to them?

 

[REWahoo]

Any preventative advice offered to them?

Postpone your death as long as possible.

 

[Taxman59]

Any preventative advice offered to them?

Use protection when you are young!