Estate / Gift Tax Questions


J

Jposterman

Situation:

Father died in 2004, was fairly wealthy, estate value about
3.5 million. There were 5 heirs (children). Estate probated
in Missouri, now ready for distribution. Each heir is told
to expect around $500k cash as their share.

Questions:

1. Is the cash distribution to the heirs mentioned above
taxable to the heirs in any way? Isn't it true the Estate
would have already paid any estate taxes before the
distribution?

2. On a related note, what are the tax implications if I
give my son $70,000 cash as a gift in 2006. I am retired,
have no income other than Social Security and what I will
earn as income on my inheritance noted above. My son, is an
adult and is gainfully employed. Will either of us have to
pay a gift tax if I give him $70k in one lump sum? Money
would be used to help him pay off old student loans and to
help him out (not for education or medical purposes)

3. Is is true I can give $11,000 each year to any person tax
free? Would this include a gift of $11k to my son, $11k to
his wife, $11k to each of his 2 minor children, every year?

Thanks in advance for your help.
 
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H

Herb Smith

Jposterman said:
Situation:

Father died in 2004, was fairly wealthy, estate value about
3.5 million. There were 5 heirs (children). Estate probated
in Missouri, now ready for distribution. Each heir is told
to expect around $500k cash as their share.

Questions:

1. Is the cash distribution to the heirs mentioned above
taxable to the heirs in any way? Isn't it true the Estate
would have already paid any estate taxes before the
distribution?
The estate is required to pay any estate taxes due, prior to
distribution to the heirs. The heirs would not be subject to
any federal tax, but may be subject to state "inheritance
tax", based on their relationship to the decedent.
Individual states vary, so you need to check locally.
2. On a related note, what are the tax implications if I
give my son $70,000 cash as a gift in 2006. I am retired,
have no income other than Social Security and what I will
earn as income on my inheritance noted above. My son, is an
adult and is gainfully employed. Will either of us have to
pay a gift tax if I give him $70k in one lump sum? Money
would be used to help him pay off old student loans and to
help him out (not for education or medical purposes)
YOU will be required to file a Gift Tax return (form 709)
for any gift amount greater than $11,000 in a single year.
Your son, as giftee, has no tax obligation. You may have to
pay gift tax if your lifetime taxable giving has exceeded
the exemption amount of $1,000,000. In most cases, this does
not occur and the taxable gift amount will merely reduce
your estate tax exemption dollar for dollar. What your son
does with the money is immaterial.
3. Is is true I can give $11,000 each year to any person tax
free? Would this include a gift of $11k to my son, $11k to
his wife, $11k to each of his 2 minor children, every year?
Yes and yes. Make sure that the gifts are clearly separate
(i.e. do not write a single check for $44,000).
 
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B

Bill

(e-mail address removed) (Jposterman) asked:
Situation:
Father died in 2004, was fairly wealthy, estate
value about 3.5 million. There were 5 heirs
(children). Estate probated in Missouri, now
ready for distribution. Each heir is told to
expect around $500k cash as their share.

Questions:
1. Is the cash distribution to the heirs
mentioned above taxable to the heirs in any
way? Isn't it true the Estate would have
already paid any estate taxes before the
distribution?
No, it is not taxable to heirs; and Yes, any estate taxes
should have been paid. (But note any earnings from the
inherited assets -- e.g., stock dividends -- would of course
be taxable.
2. On a related note, what are the tax
implications if I give my son $70,000 cash as a
gift in 2006. I am retired, have no income
other than Social Security and what I will earn
as income on my inheritance noted above. My
son, is an adult and is gainfully employed. Will
either of us have to pay a gift tax if I give him
$70k in one lump sum? Money would be used
to help him pay off old student loans and to
help him out (not for education or medical
purposes)
First, the recipient of a gift _never_ owes tax on the gift
itself. In your situation as described, the excess above
the $11,000 annual limit would result in a reduction in your
eventual estate tax allowance. If you have other
substantial assets, this might be a consideration; however,
on the facts presented it wouldn't seem to be a problem for
you, since the Federal "inheritance tax" doesn't kick in
until the total estate exceeds $2 Million (and going up to
$3 Million, heading north until it disappears in 2010 --
then, under current law, reverts to the previous levels).
3. Is is true I can give $11,000 each year to
any person tax free? Would this include a gift
of $11k to my son, $11k to his wife, $11k to
each of his 2 minor children, every year?
Yes.

Bill
 
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P

Phil Marti

Jposterman said:
Father died in 2004, was fairly wealthy, estate value about
3.5 million. There were 5 heirs (children). Estate probated
in Missouri, now ready for distribution. Each heir is told
to expect around $500k cash as their share.

Questions:

1. Is the cash distribution to the heirs mentioned above
taxable to the heirs in any way? Isn't it true the Estate
would have already paid any estate taxes before the
distribution?
The estate certainly should have already paid the estate
tax, the amount of which has been agreed to by the IRS. The
probate court will usually verify this before authorizing
distribution, but you can check the court records if you're
concerned.

There may be some untaxed income as a part of the
distribution. That would be taxable to the heir in the year
received, but the inheritance itself is tax-free.
2. On a related note, what are the tax implications if I
give my son $70,000 cash as a gift in 2006. I am retired,
have no income other than Social Security and what I will
earn as income on my inheritance noted above. My son, is an
adult and is gainfully employed. Will either of us have to
pay a gift tax if I give him $70k in one lump sum?
You would have to file a gift tax return. Assuming you've
never made taxable gifts before this, you would not actually
pay any gift tax. Rather, you'd use some of your unified
credit. Gift tax is imposed on the donor, not on the
recipient.
Money
would be used to help him pay off old student loans and to
help him out (not for education or medical purposes)

3. Is is true I can give $11,000 each year to any person tax
free? Would this include a gift of $11k to my son, $11k to
his wife, $11k to each of his 2 minor children, every year?
Yes. The amount increases to $12,000 in 2006. Watch out
for those gifts to minors. I'd get some legal advice on
this first.

Not that you asked, but have you considered YOUR future?
Should you need longterm care that $500,000 can disappear
quickly. A session or two with a fee-based financial
planner could be a good investment for you.
 
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S

Stuart A. Bronstein

Jposterman said:
Father died in 2004, was fairly wealthy, estate value about
3.5 million. There were 5 heirs (children). Estate probated
in Missouri, now ready for distribution. Each heir is told
to expect around $500k cash as their share.

Questions:

1. Is the cash distribution to the heirs mentioned above
taxable to the heirs in any way? Isn't it true the Estate
would have already paid any estate taxes before the
distribution?
I'd have to know all the details of the probate. But in
general the estate pays both estate and income taxes before
distribution and the heirs aren't left with a tax bill.
2. On a related note, what are the tax implications if I
give my son $70,000 cash as a gift in 2006.
Depending on your past gifting patterns, and assuming no
past gifts requiring filing of a gift tax return, you will
incur a gift tax but not have to pay one. That is to say
that the gift will be deducted from your lifetime exemption
(unless you die in 2010), and will reduce the amount of any
estate tax credit your estate may have when you die.

In other words, no tax now, maybe more later.
3. Is is true I can give $11,000 each year to any person tax
free? Would this include a gift of $11k to my son, $11k to
his wife, $11k to each of his 2 minor children, every year?
The answer to that all is yes, with two qualifications.
First, if you are married the gifts can actually be doubled.
If you're not in a community property state you may need to
file a gift tax return to get the additional exemption.

In addition, starting in 2005 the exemption amount is going
up from $11,000 to $12,000. So instead of $44,000 per year
to your son's family, you could give $48,000.

Stu
 
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J

joetaxpayer

Jposterman said:
Situation:

Father died in 2004, was fairly wealthy, estate value about
3.5 million. There were 5 heirs (children). Estate probated
in Missouri, now ready for distribution. Each heir is told
to expect around $500k cash as their share.

Questions:

1. Is the cash distribution to the heirs mentioned above
taxable to the heirs in any way? Isn't it true the Estate
would have already paid any estate taxes before the
distribution?

2. On a related note, what are the tax implications if I
give my son $70,000 cash as a gift in 2006. I am retired,
have no income other than Social Security and what I will
earn as income on my inheritance noted above. My son, is an
adult and is gainfully employed. Will either of us have to
pay a gift tax if I give him $70k in one lump sum? Money
would be used to help him pay off old student loans and to
help him out (not for education or medical purposes)

3. Is is true I can give $11,000 each year to any person tax
free? Would this include a gift of $11k to my son, $11k to
his wife, $11k to each of his 2 minor children, every year?

Thanks in advance for your help.
1 - The 2004 estate tax exemption was $1.5 Million, and the
marginal rate starts out very high, so $2.5 net sounds
right. The estate pays the tax, not the beneficiaries. Your
share is $500,000 net.

2 - In 2005 you may give $11,000 to anyone (esp the board
moderator) you wish. Any amount above that is subject to the
gift tax, or you may file a form taking a deduction against
your lifetime unified credit. (in fact, the first $1.5M of
dad's estate was not taxed only because the estate had a
'credit' to negate the tax on this amount. you may start to
tap the credit for yourself to remove money from your estate
now). Next year, 2006, I understand the gift amount rises to
$12,000.

On another note - if any of your assets are in IRAs, please
consider converting to ROTH IRAs over time. Inheriting a
regular IRA means a lifetime of withdrawals at the marginal
tax rate, but a Roth's deductions are tax free for the
live(s) of the recipients. Setting them up as separate,
smaller accounts, you can leave them to the grand kids, and
set them up for life with just a small transfer now. You can
change beneficiaries at any time. (sorry for the digression)

JOE

Moderator: What a kind thought :)
 
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L

L K Williams

Jposterman said:
Situation:

Father died in 2004, was fairly wealthy, estate value about
3.5 million. There were 5 heirs (children). Estate probated
in Missouri, now ready for distribution. Each heir is told
to expect around $500k cash as their share.

Questions:

3. Is is true I can give $11,000 each year to any person tax
free? Would this include a gift of $11k to my son, $11k to
his wife, $11k to each of his 2 minor children, every year?
Yes, you may give each member of the family a gift of
$11,000 without gift tax problems. However, you should
realize that any gifts to minor children cannot be used to
pay your son's debts. Once you have made the gift, the
money belongs to the child, not your son, and would have to
be put in a UTM account. Monies in such accounts may not be
used except for the benefit of the child or to pay for
anything that is a parental obligation under state law.
Thus, this money cannot be used to pay for groceries or
mortgage payments, for example, so that the parent may use
his/her money to pay the student loans, etc.

Lanny K. Williams, CPA
Nawarat, Williams & Co., Ltd.
Income Tax Services for Expatriate Americans
 
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P

Paul Thomas, CPA

Jposterman said:
Father died in 2004, was fairly wealthy, estate value about
3.5 million. There were 5 heirs (children). Estate probated
in Missouri, now ready for distribution. Each heir is told
to expect around $500k cash as their share.

Questions:

1. Is the cash distribution to the heirs mentioned above
taxable to the heirs in any way?
Generally the answer is no. But - and there is always a
"but" - if any of the estate is considered "income with
respect to the decedent" it will be taxable to the
recipient. Generally we're talking about IRA's, anuities,
pensions and the like.
Isn't it true the Estate would have already paid
any estate taxes before the distribution?
One hopes so.
2. On a related note, what are the tax implications if I
give my son $70,000 cash as a gift in 2006.
You would have to file a gift tax return. Unless your total
lifetime taxable gifts (gifts that exceeded the annual gift
limits) exceed the estate tax cap (currently 1.5 million)
there would be no gift tax due.
I am retired, have no income other than Social Security
and what I will earn as income on my inheritance noted
above. My son, is an adult and is gainfully employed.
Will either of us have to pay a gift tax if I give him $70k
in one lump sum?
Probably not, unless you have already exceeded the annual
gift limits (the estate limit essentially).
Money would be used to help him pay off old student loans and to
help him out (not for education or medical purposes)
It doesn't matter what he uses the money for.
3. Is is true I can give $11,000 each year to any person tax
free? Would this include a gift of $11k to my son, $11k to
his wife, $11k to each of his 2 minor children, every year?
Yes, and remember that that amount is the ~annual~ limit,
and includes all gifts during the year. So if you stroke a
check for $11,000 you can't give them anything else during
the year without having to file a gift tax return.

And yes, gifts can be "split" so that you can gift your son
$11k, his wife $11k, etc and so on.

Caution should be noted for gifts to the minor children.
Although I'm sure your son raised them right, that money is
theirs. And they can do with it what the want when they
turn of age. Also mom and dad shouldn't be spending it on
themselves, because it's the child's money. And, in the
event of colleges, they will expect those funds to be used
prior to any financial aid kicking in.
 
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