Transfer on Death Tax

Receiving an inheritance can be an unexpected windfall. Although if you get stocks and securities through a transfer on death account, don’t be surprised when your gift has a tax bill attached.

A transfer on death account is a popular estate planning tools designed to avoid probate by naming a beneficiary to a brokerage account. However, it doesn’t avoid taxes. In fact, transfer on death accounts are exposed to all the same income and capital gains taxes when the account owner is alive, as well as estate and inheritance taxes upon the owner’s death.
Before setting-up a transfer on death account, you should review the tax implications of these accounts.

During your lifetime, you have full ownership and control of assets in a transfer on death account. You can manage the investments as you see fit, make additions or withdrawals, and even close the account if you wish. Since you receive all interest, dividends or other income, you’re responsible for taxes on any income.

When someone dies and their property transfers to their beneficiaries, the federal government impose an estate tax on the value of all that property. Since the transfer on death account is not a trust, it does not help you avoid or minimize estate taxes. The IRS requires those passing in 2016 or later with estates exceeding $5.45 million in assets to pay estate taxes. Unless this threshold is reached, there is no IRS filing requirement.
Only a handful of states collect estate taxes. Of the states that impose their own tax, the value of the estate must exceed the tax exemption value before any taxes are owed.

An inheritance tax is a state-imposed tax that you pay when receiving money or property from a deceased person’s estate. Fortunately, these taxes are almost a thing of the past. Only a handful of states still collect an inheritance tax. Those states with a tax, have a relatively high threshold before taxes are due. Unlike an estate tax, beneficiaries pay the inheritance tax and it is usually due shortly after funds are received by the beneficiary.

Depending on your relationship to the deceased, you may qualify for an exemption or reduction in the amount of inheritance tax owed. For example, most states exempt a spouse who inherits property from their deceased spouse.

Transfer on death accounts may offer capital gains benefits. If you have appreciated stocks in your brokerage account and sold them before your death, you would owe a tax on any profits (capital gains) earned. Simply put, capital gains are the difference between the sale price of an investment and the original purchase price (the tax basis) of that investment.

When you created a transfer on death account by naming a beneficiary to your brokerage account, the laws sets the inheritor’s tax basis as the value at the time of the previous owner’s date of death.

For example, imagine you purchased 1,000 share of stock for $10 each. Several years later the stock is valued at $75 a share. If you sold the stock, you’d owe a capital gains tax on $65 profit per share or $65,000. With a transfer on death account, your beneficiary receives stock valued at $75 a share. If he sells the stock for that price, no capital gains is owed because he sold an asset valued at $75 for its face value.

When you die death, your estate administrator will likely need to file your last tax return. If you owe estate or income taxes, these will need to be paid before distributions are made to your beneficiaries. Before you set up a transfer on death account, be sure there are other funds available to pay your final costs.

State law may require the beneficiary to contribute toward the payment of the estate tax or inheritance tax bill when the estate does not have other funds available. A few states allow you to place instructions in your will or living trust that require the transfer on death account beneficiary to use those funds to cover any tax liability.

Transfer on Death Tax Lawyer Free Consultation

When you need legal help with a transfer on death matter, please call Ascent Law for your free consultation (801) 676-5506. We want to help you.

Michael Anderson

People who want a lot of Bull go to a Butcher. People who want results navigating a complex legal field go to a Lawyer that they can trust. That’s where I come in. I am Michael Anderson, an Attorney in the Salt Lake area focusing on the needs of the Average Joe wanting a better life for him and his family. I’m the Lawyer you can trust. I grew up in Utah and love it here. I am a Father to three, a Husband to one, and an Entrepreneur. I understand the feelings of joy each of those roles bring, and I understand the feeling of disappointment, fear, and regret when things go wrong. I attended the University of Utah where I received a B.A. degree in 2010 and a J.D. in 2014. I have focused my practice in Wills, Trusts, Real Estate, and Business Law. I love the thrill of helping clients secure their future, leaving a real legacy to their children. Unfortunately when problems arise with families. I also practice Family Law, with a focus on keeping relationships between the soon to be Ex’s civil for the benefit of their children and allowing both to walk away quickly with their heads held high. Before you worry too much about losing everything that you have worked for, before you permit yourself to be bullied by your soon to be ex, before you shed one more tear in silence, call me. I’m the Lawyer you can trust.

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