Income Tax

[mjgaskell]

What is the name of your state? Washington
My sister and I are both single, no heirs. She is the sole beneficiary of my will and I am the sole beneficiary of hers. Neither of us will have estates in excess of $1 million.
Will I have to pay some kind of income tax on the value of her estate when she dies? She has some real property.
Thanks

 

[tranquility]

Not if you guys die before 2011.

 

[LdiJ]

Not if you guys die before 2011.

Which is when the current laws expire. Unfortunately no one knows what laws may or may not be put in place when the current laws expire. Logically, its not very likely that the laws will change dramatically in the short term, but its impossible to guess what might happen in the long term.

My "best guess" is that there won't end up being dramatic changes....but that is nothing more than my "best guess".

 

[FlyingRon]

It doesn't matter when you die. You don't pay "income tax" on the inheritance. If you have income over the limit (which changes over hte years) then estate pays the tax before you inherit it.

Generally, the major concern is that if you have some valuable item in the estate (house, family jewels) that you don't want to liquidate to pay the estate tax (if due), how you want to prepare for that situation.

A few minutes with an estate planner will probably handle the details for a minimal fee (unless large amounts of papers need to be involved).

 

[mjgaskell]

I guess part of my question is: Does a sister INHERIT a sibling's assets? Or would this be considered a GIFT and subject to gift taxes?

 

[abezon]

It doesn't matter when you die. You don't pay "income tax" on the inheritance. If you have income over the limit (which changes over hte years) then estate pays the tax before you inherit it.

I think you mean "assets over the limit." Assets are taxed one way, income another. Say someone dies owning $900,000 worth of rental homes & $50,000 cash. Their assets total $950,000 & they pay no estate tax. (Form 760) However, the $8,000 per month rent received from tenants is income. It is taxed separately. (Form 1041) Either the estate pays the taxes on the rental income, or it passes the net rental income through to the heirs & the heirs pay the taxes on their personal 1040s. Option 2 is better because the heirs are in a lower tax bracket, usually.

 

[mjgaskell]

Isn't there a MAJOR difference in receiving assets whether in the form of cash or otherwise as an INHERITANCE? Aren't the only people who can receive an inheritance HEIRS? As a sister, can I actually inherit her stuff?
Thanks, Jeannine (I get more confused everyday)

 

[xylene]

A gift occurs when someone is alive.

An inheritance is the disposition of estate property.

The 'heirs' thing you are talking about apply in an intestate situation. You would be your sisters heir as her closest relative. That is irrelevant here as you and your sisters have wills designating each other as the sole beneficiary.

The person reviecing the inheritiance owes no income tax. It isn't income.

The estate may owe estate taxes, depending on circumstances.

BTW - say you elected to gift your sister (or vice versa) all your assets. The recipient would owe no taxes. The person giving the gift might. (You Should consult IRS pub 950 on this)

Seeing an estate planner is sound idea.

 

[mjgaskell]

Thank you so much! Do I have this right?: If I included my best friend (no blood relationship or legal relationship) as one of my beneficiaries and gave him, say, $100,000, he would not have to claim it as income and he would actually INHERIT money from me? Jeannine

 

[xylene]

Thank you so much! Do I have this right?: If I included my best friend (no blood relationship or legal relationship) as one of my beneficiaries and gave him, say, $100,000, he would not have to claim it as income and he would actually INHERIT money from me? Jeannine

It would not be a gift.

An inheritance is not income.

A gift isn't income.

You could give your BF 100,000 and that person would owe no income tax.

You might owe gift tax - consult IRS pub 950 or better yet a tax / estate planner for these issues.

 

[FlyingRon]

Thank you so much! Do I have this right?: If I included my best friend (no blood relationship or legal relationship) as one of my beneficiaries and gave him, say, $100,000, he would not have to claim it as income and he would actually INHERIT money from me? Jeannine

As said, if you don't have a will (intestate succession) the court will decide who among your relatives will get the inheritance.

If you have a will, you SPECIFY who will get what.

As far as this goes, the person who is spelled out in the will (or by the rules of intestate sucsession) becomes your heir. Other than the rules for intestate succession blood/legal relationship (other than YOUR marriage) makes no difference.