Basic estate tax question


P

P. Clark

A friend of mine has a real basic tax question - he is the
sole beneficiary of a trust (to be payable upon a parent's
death), and the trust is well below $600,000. Upon
inheritance, will he have to pay income tax on this?
Apparently his banker said something confusing today which
made him think he would have to pay "income tax" on his
inheritance. Is "estate tax" and "income tax" the same
thing? His banker is fairly well aware of the size of the
estate, that it's not all that big, yet he seemed to be
suggesting that my friend would have to pay taxes on it????
Is this true under any circumstances? Pretty basic
question, seems fairly straightforward that this is not the
type of "income" that is taxable (at the level below
$675,000, and thus exempt from federal taxation). Thanks
for a basic answer!
 
Ad

Advertisements

J

John H. Fisher

A friend of mine has a real basic tax question - he is the
sole beneficiary of a trust (to be payable upon a parent's
death), and the trust is well below $600,000. Upon
inheritance, will he have to pay income tax on this?
Apparently his banker said something confusing today which
made him think he would have to pay "income tax" on his
inheritance. Is "estate tax" and "income tax" the same
thing? His banker is fairly well aware of the size of the
estate, that it's not all that big, yet he seemed to be
suggesting that my friend would have to pay taxes on it????
Is this true under any circumstances? Pretty basic
question, seems fairly straightforward that this is not the
type of "income" that is taxable (at the level below
$675,000, and thus exempt from federal taxation). Thanks
for a basic answer!
No federal tax on the principle. Tax must be paid on any
earnings generated by the trust. There could be state
inheritance tax. Each state has its own rules.

"Jack" - John H. Fisher - (e-mail address removed)
Philadelphia, Pa - Atlantic City, NJ - West Wildwood, NJ
My Newsgroups & Boards at: http://members.aol.com/TaxService/index.html

Where Ignorance is bliss, 'tis folly to be wise!=:)
 
D

Dan Evans

P. Clark said:
A friend of mine has a real basic tax question - he is the
sole beneficiary of a trust (to be payable upon a parent's
death), and the trust is well below $600,000. Upon
inheritance, will he have to pay income tax on this?
No.

There may be taxes to be paid by the parent's estate on
income earned by the trust before death, and there may be
income earned after death that will be taxed, but the
principal is not income.
Apparently his banker said something confusing today which
made him think he would have to pay "income tax" on his
inheritance. Is "estate tax" and "income tax" the same
thing?
No.

His banker is fairly well aware of the size of the
estate, that it's not all that big, yet he seemed to be
suggesting that my friend would have to pay taxes on it????
There would be no federal estate tax on a gross estate of
$600,000 (and the trust would be included in the "gross
estate" for estate tax purposes if it was revocable during
lifetime) because there is a federal estate tax "applicable
exemption amount" of $1,500,000 (in 2004 and 2005; it goes
up after that).

However, there could be federal estate tax payable if (a)
there are other assets outside of the trust (such as life
insurance or IRAs or retirement benefits) that increase the
total taxable estate to more than $1,500,000 or (b) there
were taxable gifts made during lifetime that effectively
used up all or part of the $1,500,000 exemption.

*Dan Evans
*Author of the Tax Protester FAQ
*http://evans-legal.com/dan/tpfaq.html
 
N

Nan Eklund

Very basic:
income tax (on income) and estate tax (on total wealth) are
two different systems. Estate is what one has when one dies.
Inheritance (not taxable) is what one gets from someone who
dies.

The tax on an estate starts at a certain level (1.5 million
in 2004). If the principal in an estate is under that
amount, there is no estate tax NOR income tax.

However, an estate (which is a trust now) of that size
should be earning some income and that IS taxable. When the
parent dies, the heir is taxed on the INCOME the principal
earns from date of death.

Hopefully this stays in Tax 101.

Nan, EA in LA
 
S

Stuart Bronstein

P. Clark said:
A friend of mine has a real basic tax question - he is the
sole beneficiary of a trust (to be payable upon a parent's
death), and the trust is well below $600,000. Upon
inheritance, will he have to pay income tax on this?
There may be some income tax payable on income of the estate
either before or after his parents die. But there is no
income tax payable on the principal portion of the
inheritance.
Apparently his banker said something confusing today which
made him think he would have to pay "income tax" on his
inheritance. Is "estate tax" and "income tax" the same
thing?
No, income tax and estate tax are different. Income tax is
a tax basically on what is earned, such as interest, rent
and wages.

Estate tax is basically a property tax assessed on the gross
value of what a person owns when he dies. For anyone dying
after 2010 (as the law now stands) the first $1,000,000 is
untaxed.
His banker is fairly well aware of the size of the
estate, that it's not all that big, yet he seemed to be
suggesting that my friend would have to pay taxes on it????
Talk to a qualified tax preparer with experience doing
estate tax returns, or a tax attorney.

Stu
 
M

MAT1040X

A friend of mine has a real basic tax question - he is the
sole beneficiary of a trust (to be payable upon a parent's
death), and the trust is well below $600,000. Upon
inheritance, will he have to pay income tax on this?
Apparently his banker said something confusing today which
made him think he would have to pay "income tax" on his
inheritance. Is "estate tax" and "income tax" the same
thing? His banker is fairly well aware of the size of the
estate, that it's not all that big, yet he seemed to be
suggesting that my friend would have to pay taxes on it????
Is this true under any circumstances? Pretty basic
question, seems fairly straightforward that this is not the
type of "income" that is taxable (at the level below
$675,000, and thus exempt from federal taxation). Thanks
for a basic answer!
No, Estate tax and Income tax are not the same thing. There
would be no estate tax on an estate this size. However, if
part of the estate was composed of IRA's then the
beneficiary would have to pay income tax on the
distributions. If the inheritance consisted of just cash,
stocks, bonds, etc. there would be no income tax on receipt
of these items. However, the income generated from these
investments would be taxable.

Mary Ann Thomas, EA in AZ
 
Ad

Advertisements

D

David Woods, EA, ChFC, CLU

P. Clark said:
A friend of mine has a real basic tax question - he is the
sole beneficiary of a trust (to be payable upon a parent's
death), and the trust is well below $600,000. Upon
inheritance, will he have to pay income tax on this?
Apparently his banker said something confusing today which
made him think he would have to pay "income tax" on his
inheritance. Is "estate tax" and "income tax" the same
thing? His banker is fairly well aware of the size of the
estate, that it's not all that big, yet he seemed to be
suggesting that my friend would have to pay taxes on it????
Is this true under any circumstances? Pretty basic
question, seems fairly straightforward that this is not the
type of "income" that is taxable (at the level below
$675,000, and thus exempt from federal taxation). Thanks
for a basic answer!
There is no income tax on receiving an inheritance. Income
tax and estate tax are not the same things.

PS. Don't take tax advice from bankers.
 
D

D. Stussy

P. Clark said:
A friend of mine has a real basic tax question - he is the
sole beneficiary of a trust (to be payable upon a parent's
death), and the trust is well below $600,000. Upon
inheritance, will he have to pay income tax on this?
Apparently his banker said something confusing today which
made him think he would have to pay "income tax" on his
inheritance. Is "estate tax" and "income tax" the same
thing? His banker is fairly well aware of the size of the
estate, that it's not all that big, yet he seemed to be
suggesting that my friend would have to pay taxes on it????
Is this true under any circumstances? Pretty basic
question, seems fairly straightforward that this is not the
type of "income" that is taxable (at the level below
$675,000, and thus exempt from federal taxation). Thanks
for a basic answer!
Inherited ASSETS are not income taxable.

It's possible that what he has inherited is the RIGHT TO
RECEIVE income, and that would be taxable to him the same
way that it would be to the decedent, except if it's a
short-term capital gain, it becomes long-term.
 
Ad

Advertisements

G

Gene E. Utterback, EA

P. Clark said:
A friend of mine has a real basic tax question - he is the
sole beneficiary of a trust (to be payable upon a parent's
death), and the trust is well below $600,000. Upon
inheritance, will he have to pay income tax on this?
Apparently his banker said something confusing today which
made him think he would have to pay "income tax" on his
inheritance. Is "estate tax" and "income tax" the same
thing? His banker is fairly well aware of the size of the
estate, that it's not all that big, yet he seemed to be
suggesting that my friend would have to pay taxes on it????
Is this true under any circumstances? Pretty basic
question, seems fairly straightforward that this is not the
type of "income" that is taxable (at the level below
$675,000, and thus exempt from federal taxation). Thanks
for a basic answer!
This may not be as straight forward as you may think. The
real answer, as is always the case, depends on the details
of the situation. The primary concern is the nature of the
$600K in the trust. For example, if the $600K is a house
then the house will pass to the beneficiary with no estate
or income tax liabilities. However, if the $600K is in a
tax deferred plan of some type, like an IRA, 401(k),
annuity, etc, then there should be no estate tax, but the
beneficiary could easily have some income tax liability for
the untaxed portion.

I assume your reference to $675K being the level for federal
taxation refers to the estate tax exclusion - if so, you
should be advised that currently the excludable amount is
$1.5M and will be increasing until 2010.

Good luck,
Gene E. Utterback, EA
 

Ask a Question

Want to reply to this thread or ask your own question?

You'll need to choose a username for the site, which only take a couple of moments. After that, you can post your question and our members will help you out.

Ask a Question

Similar Threads


Top