Kansas and Missouri Estate Planning

What are Some Common Real Estate "Inheritance" Issues?

Inheriting real estate can be complex.

You have inherited real estate.

You have a lot of questions.

In fact, tax questions may be foremost on your mind.

According to a recent Petoskey News-Review in the article “The pros and cons of inheriting real estate,” taxes due are dependent upon a few factors.

Not all states have an "inheritance" tax.

If you live in a state without an inheritance tax, you will not owe anything on the property simply because you inherited it.

Kansas and Missouri fall into this camp.

However, our Cornhusker neighbors (oh, how I miss the Big 8 Conference) do have an inheritance tax.

What about real estate capital gains taxation?

How does that work on gifted and on inherited real estate?

Capital gains and losses are calculated based the purchase and sale price of the home.

Let us say your parent gives you his or her home.

The price when purchased was $100,000.

You then turnaround and quickly sell the home at $220,000.

You will need to pay taxes on the $120,000 in gains.

What if you inherit the home instead assuming the same numbers?

If you sell the property at $220,000 soon after the death of your parent, then you will pay no capital gains taxes.

Why?

At death of the owner, the property received a step-up in basis to its new value.

Having the property valued by an experienced real estate appraiser is important for you to determine the actual value at the date of death.

Do not know an appraiser?

Ask an experienced estate planning attorney.

He or she may be able to give you a recommendation.

Taxes are not the only issues faced when inheriting a home.

Interpersonal conflict can arise.

If multiple children inherited a home and they disagree about selling, then families can be torn apart through conflict.

Discuss these plans with your parents and among your siblings before inheriting.

By doing so you will keep family peace and manage expectations.

Open communication throughout the estate planning process will help bring your family together rather than bring discord.

After all, home is where the heart is.

Reference: Petoskey News-Review (June 25, 2019) “The pros and cons of inheriting real estate”

What Taxes Should I Expect to Pay on My Inheritance?

Taxes on inheritances vary.

Someone who knows you and loves you had money.

He or she died.

Now you have received an inheritance.

What should you do now?

According to a recent Orange Town News article titled “Will I Pay Taxes on My Inheritance,” your actions are dependent on the type of inheritance you received.

Let us take a look.

Bank Savings Accounts or CDs.

If the account is not a retirement account, the federal government will not impose an income tax.

The federal government does not have an inheritance tax either.

Unfortunately, certain states will impose an "inheritance" tax.

These include Iowa, Maryland, New Jersey, Kentucky, Nebraska, and Pennsylvania.

Talk with an experienced estate planning attorney about the best actions to take.

Primary Residence or Other Real Estate.

Inheriting a home or real estate does not trigger taxes.

When you sell the property and home, you will may be taxed on capital gains.

Valuation is established on the day of death.

Let us say the value is $250,000 at the date of death and you wait to sell it.

When you do sell, the value has risen to $275,000.

The $25,000 gain must then be taxed.

The day you take ownership determines the cost-basis.

Life Insurance Proceeds.

These proceeds are not taxable as income.

There is an exception.

If interest is earned, you could owe taxes.

This occurs when the receipt of the proceeds is delayed.

The Form 1099-INT muse be filed by the beneficiary.

The interest will be taxable by both the state and the federal government.

If the proceeds are transferred to an individual before the insured dies, the proceeds are fully taxable.

There is another possible exemption: the value of the death benefit is included as part of your gross estate for determining federal estate taxes.

Consequently, if the amount of life insurance death benefit put you above the federal estate tax exemption ($11.4 million per taxpayer for 2019), then your estate may be subject to taxation.

Retirement Accounts: 401(k) and IRA.

Whether a traditional IRA is inherited or not, distributions are taxable.

Roth IRA distributions are not taxable, unless taken within five years of the IRA being established.

Laws for retirement plan distributions may change based on pending legislation.

And not for the better.

This means you should discuss options with your experienced estate planning attorney.

Some 401(k)s are taxed or will be taxable.

How much is the tax?

This depends on the particular rules of the 401(k) plan.

The distribution for some plans must be a lump sum.

If a spouse inherits, he or she may rollover into an IRA.

If not a spouse, the lump-sum will likely have to be taken and the resulting taxes paid.

Stocks.

Usually, capital gains are paid on gains made during the period of ownership post-inheritance. (See the hypothetical regarding real estate above.)

When inherited, cost basis is determined from the fair market value on the date of death.

Artwork and Jewelry.

If assets like jewelry, artwork, rare stamps, books antiques, and coin collections are inherited, they will trigger a tax on the next gain at sale.

The rate is higher than most capital gains assets.

Instead of 15 or 20 percent, the capital gains rate is 28 percent.

Valuation like other assets is determined on date of death or the alternate valuation date.

Before accepting your inheritance, you should discuss the inheritance and the tax liability with your attorney.

This will help you have a better understanding of your situation and how your choices will impact your finances.

Reference: Orange Town News (May 29, 2019) “Will I Pay Taxes on My Inheritance”

What States have the Highest Death Taxes?

Some states have harsher estate tax laws.

You probably do not think about death taxes when you decide where to retire.

Maybe you should.

Where you live will impact the inheritance you leave to your loved ones.

According to a recent Fox News article titled “Estate and inheritance tax guide: The best and worst states to die in,” there are currently 18 states with estate or inheritance taxes of their own.

What is the difference between an estate and inheritance tax?

An estate tax is paid by the estate before the heirs inherit.

An inheritance tax is paid by the heir, even if he or she lived in a different state than the decedent.

Are the laws of some states less favorable than others?

Yes.

Only six states have an inheritance tax.

If you want to avoid this completely, do not reside in Iowa, Kentucky, Maryland, Nebraska, New Jersey, or Pennsylvania when you die.

If you are only leaving your assets to your spouse, the inheritance tax usually does not apply.

Some states allow for exemptions for children or siblings.

If you are leaving money to your children and grandchildren, do not move to Nebraska or Pennsylvania.

In Nebraska immediate relatives must pay a 1 percent tax on the amount exceeding $40,000.

Pennsylvania levies a 4.5 percent tax for children or lineal heirs.

If you are not an immediate relative, Nebraska will levy an inheritance tax at 18 percent.

Yikes!

The other states are less dramatic, but still significant at levels between 10 and 16 percent.

This is a lot of money to gamble by remaining in the state after retirement.

If you inherited from someone in one of these states, talk with an experienced estate planning attorney from the state to determine what you will owe and whether any exemptions might apply.

If you live in Maryland, do not plan on dying there.

Why?

It imposes both an estate and inheritance tax with the estate tax being 16 percent on estates exceeding 4 million.

Are there states with estate taxes you should avoid if moving in retirement in 2019?

Yes.

Avoid Connecticut, District of Columbia, Hawaii, Illinois, Main, Massachusetts, Minnesota, Oregon, Rhode Island, Vermont, and Washington.

State laws and exemptions vary and even change through the years.

In the end, there are reasons we live where we live despite the tax climate.

For example, your family, social network, church home, favorite sports teams, hobbies, and other considerations may make "home" the best place to retire independent of death tax considerations.

Be sure to work with an experienced estate planning attorney in your state and review your estate plan regularly to account for any changes going forward.

Reference: Fox News (March 28, 2019) “Estate and inheritance tax guide: The best and worst states to die in”

What are the Tax Consequences of Inheriting a Home?

Taxes are a significant question when it comes to an inheritance.

Estate taxes and inheritance taxes are important topics of estate planning.

How one creates an estate plan will in turn affect the amount of taxes owed.

According to a recent nj.com article titled “I inherited my father’s home. Do I owe any kind of taxes?,” special care must be taken when it comes to passing along a home.

If a home is sold by the estate after the death of the surviving spouse, the heirs may divide the proceeds.

The estate tax exemption is $11.4 million, per spouse at present.

If the proceeds of the sale do not drive the value of the estate above this number, then federal estate taxes will not be triggered.

Depending on the state, a state estate tax or an inheritance may be not be an issue.

Kansas is one such state.

Missouri is another.

The money from the sale could trigger income taxes.

How are income taxes calculated?

The tax is determined from the difference between the sales price and the basis at assessment minus the cost of the sale.

What is basis?

The basis is found by adding the cost of improvements to the initial purchase price.

The asset basis receives either a “set-up” or a “step-down” according to the value on the date the decedent dies.

Keep the date of death value of the home.

This will be helpful should you be audited by the IRS in the future.

What would then be owed by the heirs?

The higher the difference, the greater the tax would be.

Generally, these are not large sums in most instances.

Reference: nj.com (March 11, 2019) “I inherited my father’s home. Do I owe any kind of taxes?”

Can I Refuse to Accept My Inheritance?

You can choose to refuse an inheritance.

A loved ones has died.

You have been designated as an heir.

Perhaps congratulations are in order.

Perhaps they are not.

According to a recent Investopedia article titled “How Inheritance and Estate Tax Waivers Work,” there may be times when it is wise to not accept an inheritance.

Really?

Yes.

For example, there may be adverse estate tax consequences to you or the estate of the decedent.

What do you need to know regarding estate or inheritance disclaimers?

Disclaimer Form Language

Language must be specific and binding.

What should it include?

The decedent and the heir must be named.

In addition to a general disclaimer, you should list any assets specifically left.

You will also need it to indicate that your disclaimer is made voluntarily.

The Legal Process

States have their own laws regarding estates.

The disclaimer needs to be specific to the laws of the state where you live and filed with the appropriate jurisdiction.

You will also need to provide the estate executor with a copy of the disclaimer.

Remember, you cannot receive compensation for signing away your rights to your inheritance.

Timing and Taxes

Once the decedent passes, you have a limited amount of time to submit a waiver.

How long?

Typically, the time frame is nine months.

What if you miss the deadline?

You must accept the inheritance.

This means you will also need to pay any taxes by nine months after the date the decedent passed.

Do not waste time.

This could be a costly mistake.

Legal Consequences of Disclaiming Rights

As an heir can you redirect your disclaimed inheritance?

No.

Asset distribution will occur as if you predeceased.

These could be governed by the terms of the will, or the trust, or intestate estate of the decedent.

By all means, do not attempt these actions alone.

Work with an experienced estate planning attorney to ensure any disclaimer you may consider will meet the requirements of your state.

Reference: Investopedia (October 1, 2018) “How Inheritance and Estate Tax Waivers Work”

What are the Tax Consequences of an Inherited Vacation Home?

Fair market value will influence taxes on a property.

Do you own a vacation home in another state?

Are you wanting to pass it to your children when you die?

Many people choose to leave vacation property to their children rather than sell.

After all, you and they may have made a lot of memories and invested a lot of laughter in the walls there.

According to a recent nj.com article titled “Cost Basis for and Inherited Vacation Home,” you may want to take taxes into account on the property.

How do you do this?

You must first find out if the inherited property is taxable.

This is determined by the basis on the property.

This is usually done in one of two ways.

The first method is to use the fair market value on the date the decedent passes away.

The second method is to use the fair market value on the alternate valuation date should the executor of the estate choose to do so.

The inheritor can get the fair market value from the executor of the estate.

In fact, in some instances the executor is required to provide the fair market value to the beneficiary of the property.

What if you own only a portion of the property when you die?

Only this portion may get a step-up in basis.

Does a step-up in basis depend on whether you owe federal or state estate or inheritance taxes on the property?

No.

Even so, the value of the property reported by your children as their basis must equal the value reported on the federal estate tax return.

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: nj.com (July 24, 2018) “Cost Basis for and Inherited Vacation Home”

What is the Latest on the Maryland Estate Tax?

Maryland recently introduced new estate tax legislation.

Do you live in Maryland or have a family member living there?

Perhaps you are planning a move to this state in the near future.

You will want to make yourself aware of the estate tax laws of Maryland either way.

According to a recent LegiScan article titled“MD HB308,” Maryland recently updated its tax law.

The results?

The estate tax exclusion for the state is $5 million per person starting January 1, 2026.

This amount will be indexed for inflation, but it does carry an option for portability.

What does this mean?

The executor of the estate can make an election so any of the exempt amount not used by the deceased spouse with be added to the exemption available to the widow or widower.

Are any other tax laws changed?

The maximum estate tax rate will remain at 16 percent, and the inheritance tax will also remain the same.

The surviving spouse and children are exempt from an inheritance tax.

The maximum Maryland estate tax rate of 16% is not altered with the new legislation.

What if you die in 2018?

The exclusion amount is $4 million, not indexed for inflation.

Portability would also not be an option.

Regardless your state of residence, an experienced estate planning attorney admitted to practice there will be able to explain and plan for the tax laws applicable to your estate.

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: LegiScan (April 5, 2018) “MD HB308”

What is Unique About Annuities and Inheritance Taxes in New Jersey?

Inheritance taxes differ by state.

Inheritance taxes.

Not every state has them.

When they do, how is the tax paid?

This will depend on the state.

Fortunately, neither Kansas nor Missouri has an inheritance tax.

On the other hand, let us consider New Jersey for our Garden State subscribers.

According to a recent nj.com article titled “Who pays inheritance tax on an annuity?,” the inheritance tax is dependent upon the heir of the asset and the asset itself.

How so?

Life insurance proceeds, certain pensions, and transfers totaling less than $500 are exempt.

Other assets are subject to the inheritance tax.

What about if the asset is transferred through a beneficiary designation rather than under a will?

These are still subject to inheritance taxes.

For example, an annuity must have the date of death valuation listed on the New Jersey Inheritance Tax form.

This form must then be filed by the executor or administrator of the estate no later than eight months after the decedent died.

It must be returned with payment on taxes owed.

Who will be responsible for paying this tax?

This depends on the will.

If the will states the inheritance tax should be paid from the assets remaining after specific bequests and debts have been paid, the estate will pay if the remaining money left can cover the tax.

The will could also place the burden on the recipients to pay all estate and inheritance taxes proportionately.

This is also the default rule for the state of New Jersey should an individual die without a will.

What happens if the beneficiary refuses to pay?

The executor must pay the tax with assets from the will.

This will diminish the assets left to remaining beneficiaries.

The executor can then sue this beneficiary for the funds.

No one wants a lawsuit.

If the executor says you should pay, you should pay.

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: nj.com (May 14, 2018) “Who pays inheritance tax on an annuity?”

Should Entrepreneurs be Mindful of "Death Taxes"?

It is difficult to quantify how estate or inheritance taxes will specifically impact entrepreneurs.

You are an entrepreneur.

Or perhaps you aspire to become one.

Either way, you know that your estate will likely grow as you accumulate wealth from your efforts.

A recent Forbes article asks “How Do Estate And Inheritance Taxes Affect Entrepreneurs?”

It turns out one of the biggest financial concerns for many entrepreneurs is taxes.

Income taxes are fairly predictable.

They are required like clockwork every year.

What about estate taxes?

Great question.

But there is no solid answer.

Why?

There are too many factors and not enough data.

Could estate taxes influence entrepreneurs?

Perhaps.

However, the federal estate tax exemption was recently raised to a threshold of $11.2 million for an individual and double this amount for a couple.

As a result, wealthy entrepreneurs may pass along far more in their estates.

By failing to plan properly, their estates will be taxed at 40 percent.

Yikes!

For some entrepreneurs, estate taxation may kill some of their motivation to build significant wealth if it will only be subject to estate taxes.

This is true if one of your main estate planning goals is to leave bequests to others.

No one wants to work hard just to pass along less to those they love.

Although these factors could affect entrepreneurs, there is no concrete data to support them.

Regardless, it would be prudent for entrepreneurs to work with an experienced estate planning attorney early and often to keep all taxes in check. 

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: Forbes (March 7, 2018) “How Do Estate And Inheritance Taxes Affect Entrepreneurs?”

Why Should I Have My Estate Plan Reviewed Now?

The tax laws may change your estate planning strategy.

Taxes impact financial decisions.

When tax laws change, you often need to reevaluate your goals and strategies.

According to a recent Forbes article titled “Trusts In The Age Of Trump: Time To Re-Engineer Your Estate Plan,” this includes your estate planning.

How do the new tax laws influence estate planning?

The federal tax laws now allow for a higher federal estate tax exemption.

What is it?

The exemption is now just north of $11 million per individual when passed to children or non-charitable heirs.

This means the assets will pass without estate or federal gift taxes.

If you are married you could combine your exemptions and transfer just north of $22 million free of federal estate taxes.

By transferring the assets into a dynasty trust, your wealth could grow and pass to unlimited generations in the future without being subject to estate taxes.

If your state has an estate tax or inheritance tax below the federal threshold, you will need to consider this in your planning.

Otherwise, you could owe your state government a sizeable bill.

You will want to avoid leaving a trust with the exemption amount to children and the rest to your spouse.

Why?

This could disinherit your wife and allow your children to receive everything.

The new tax laws now allow for "portability" of the federal estate tax exemption between spouses.

What does this mean?

This means that whatever exemption amount unused by the first spouse to die will pass to the widow or widower.

However, this is not automatic.

The executor must file a tax return electing portability for this to happen.

Are you concerned about capital gains taxes?

If yes, then you may want to skip using a traditional credit shelter trust with assets like collectibles, stocks, mutual funds or real estate.

Why?

When you die, these assets will receive a step-up in basis at your passing to their current value.

This means heirs can sell these inherited assets immediately and would not owe a capital gains tax.

If you leave these assets directly to your spouse, he or she can receive a step-up in basis at your death and the assets will get another step-up when he or she dies.

If you leave them through a shelter trust, the assets will only receive a step-up in basis at your passing.

Trusts are complex estate planning tools.

They have their purposes, but you want to be sure the possible purposes fit your needs.

Work with an experienced estate planning attorney to create or revisit your plan to meet your goals.

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: Forbes (February 13, 2018) “Trusts In The Age Of Trump: Time To Re-Engineer Your Estate Plan”