Minnesota residents have no doubt heard of the debates over federal estate taxes, which pop up every few years in Congress. However these taxes, derided as “the death tax” by opponents, affect relatively few families. Currently, estates can transfer up to $5,250,000 before the federal estate tax kicks in.
However, there are many other tax problems that come up when people inherit wealth through a will. Often, especially when people pass away after a long illness, it only comes to light after their passing that they did not pay taxes for several years.
State tax issues also come up quite often when people inherit wealth. These can be especially tricky for estates that include property in more than one state. When a Minnesotan who had a winter home in Florida passes away, the heirs may be stuck trying to prove to either state which one should be considered the deceased’s primary residence for tax purposes.
And then there are the tax problems that are caused partly by the deceased’s failure to take them into account when planning his or her estate. For example, a person may have thought she provided equally for her two children when she named her daughter the beneficiary of her $100,000 life estate policy while leaving a $100,000 investment account to her son. However, life insurance proceeds may go untaxed while the investment accounts are taxed, so the result is that the son’s inheritance will be significantly less than that of the daughter.
Many of these problems can be corrected before the fact with proper estate planning, but many of them don’t make themselves apparent until after the person has passed away. It’s important for Minnesotans who inherit wealth to get professional help when they run into tax problems so that they can make sure they receive what their loved ones wanted them to receive.
Source: Reuters, “What to do when you inherit a tax mess,” Amy Feldman, July 11, 2013