Do I Pay Taxes When Someone Leaves Me Money? www.norcalplanners.com 1

DO I PAY TAXES IN NORTHERN CALIFORNIA

WHEN SOMEONE LEAVES ME MONEY?

“The estate planning equation is a two-way street. There is

the person who is leaving inheritances, and then there are

the inheritors.”

TIMOTHY P. MURPHY

NORTHERN CALIFORNIA CENTER FOR ESTATE PLANNING AND ELDER LAW

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When you are planning your estate, you should certainly consider the tax

implications that the inheritors may face. We will look at some of the facts in this

paper.

FEDERAL ESTATE TAX

The federal estate tax is a death tax that can come into play for high net worth

individuals. The amount of the federal estate tax exclusion or credit in 2015 is

$5.43 million. You can transfer as much as $5.43 million tax-free, but the estate

tax would potentially be applicable on transfers that exceed this amount.

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There is one caveat to the above statement. We have an unlimited marital estate

tax deduction in the United States. You can leave any amount of money and/or

property to your spouse free of the estate tax, as long as your spouse is an

American citizen.

We should point out the fact that the federal estate tax would be applicable on

the entirety of the taxable portion of the estate in question. It would not be

imposed on asset transfers to each individual inheritor.

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INHERITANCE TAX

Some people think that an inheritance tax and an estate tax are the same thing,

but there are differences. As we stated previously, and estate tax is levied on the

entirety of the non-exempt portion of an estate.

An inheritance tax would be levied on transfers to each inheritor who is not

exempt from the tax. It would be possible for an estate tax and an inheritance

tax to be levied.

The good news is that there is no federal inheritance tax. There are some states

in the union that have state-level inheritance taxes. We practice in the state of

California, and there is no inheritance tax in our state.

STATE-LEVEL ESTATE TAX

There are a number of

states that impose state-

level estate taxes. California

is not among them.

However, if you own

valuable property in a state

that does have a state-level

estate tax, you could face

exposure.

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INCOME TAX

It would be logical to assume that you probably have to claim an inheritance that

you receive when you file your annual income tax return. In fact, an inheritance

would not be looked upon as taxable income by the Internal Revenue Service.

CAPITAL GAINS TAX

The capital gains tax is potentially applicable if you are in possession of assets

that have appreciated. You would realize a gain for tax purposes if you liquidate

an appreciated asset and take direct possession of the gain.

If you were to inherit assets that appreciated during the life of the decedent, you

would get a step-up in basis. For capital gains purposes, the value of the assets

would be equal to their value at the time you inherited them. You would not be

required to pay capital gains taxes on the gains that took place during the

decedent's life.

However, you would face capital gains exposure if you were to realize a gain

after you assumed possession of the assets in question.

INSURANCE POLICY PROCEEDS

If you are the beneficiary of a life insurance policy, the company would pay you

directly after the death of the policyholder. You would not be required to report

the receipt of the proceeds as income for income tax purposes.

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SUMMARY

There are a handful of states that impose state-level inheritance taxes, and this

type of death tax can come into play if you live in one of these states.

Inheritances are not subject to income taxes, and this would include life

insurance proceeds.

The federal estate tax can be a factor if the value of the estate exceeds the

amount of the credit or exclusion. This tax would be levied on the entirety of the

taxable portion of the estate.

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In 2015, the exclusion stands at $5.43 million. Since this is a relatively high

exclusion, most people are not going to be exposed to the federal estate tax,

and there is no estate tax on the state level in California.

If you would like to learn more about how taxation can affect asset transfers,

schedule a consultation with a licensed estate planning attorney.

REFERENCES

IRS

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estate-and-

Gift-Taxes

Forbes

http://www.forbes.com/sites/ashleaebeling/2013/01/28/where-not-to-die-in-

2013/

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About the Author

Timothy P. Murphy

Timothy P. Murphy is an estate planning and elder law attorney

whose practice emphasizes helping people to build, preserve

and pass on their wealth. He works with his clients to

accomplish their goals while avoiding unnecessary court

proceedings and minimizing or eliminating exposure to death

taxes. Mr. Murphy also assists families facing the myriad of

problems associated with dealing with a loved one’s declining health and rising

needs for care. He has practiced law in the Sacramento area for over 32 years,

first with a large firm, and then with his own firm since 1987.

Tim has written a regular column on legal issues for Senior Magazine. He also

was a regular featured guest on the Money Experts radio program heard locally

on KFBK (AM 1530). Tim has been featured in the Sacramento Bee, Sacramento

Business Journal, Sacramento Magazine, Comstock’s Magazine and other

publications on estate planning and related topics. He also assisted local Channel

3 (KCRA) in an investigative report on the trust mill problem in the Sacramento

area and was featured on Channel 10 (KXTV) in its series on personal financial

planning.

Northern California Center for Estate Planning and Elder Law

www.norcalplanners.com

SACRAMENTO

2277 Fair Oaks Boulevard

Suite 320

Sacramento, CA 95825-5599 Phone: (916) 437-3500