What Taxes Do You Have To Pay When You Inherit?

By Lane V. Erickson, Idaho Estate Planning Attorney

When a family member or loved one dies, it is never an easy experience. This is true even for me, even though I regularly work with clients who are dealing with a loss. When grieving through the loss of a loved one, the last thing a person wants to do is have to think about or deal with taxes. However, as the saying goes, the only sure thing in life is death and taxes. Sometimes these two things go hand-in-hand. 

As the premier Pocatello estate planning attorneys, our team at Racine Olson includes partners Randy Budge, Lane Erickson and Nate Palmer and of counsel attorney Dave Bagley. Each attorney on our Pocatello estate planning team has earned the highest ratings and reviews possible from past clients and from several legal ranking services including AVVO, Justia, and Martindale & Hubbell. Our team of Pocatello estate planning attorneys have the expertise and knowledge to benefit each of our clients specifically and individually, especially when it comes to dealing with the death of a family member or loved one. 

Often, when a loved one passes away, people are overwhelmed with not only the grief of the loss, but also the many things that have to be done. I found that people are the most worried about things they do not know or understand. Because of this, we offer a free 30-minute consultation where we answer questions and provide information about the things you should be thinking about when a family member or loved one has passes away. This discussion often includes talking about inheritance taxes. 

While this article does provide a summary of the things that you should be concerned about, we encourage you to schedule the free 30-minute consultation so we can answer your specific questions and help you with your specific needs. While no two situations are the same, there are often very unique questions that come up that we can help with. There are also very common questions that we can easily answer and help you understand. 

When it comes to an inheritance and taxes, the first thing that you need to understand is that if you have received an inheritance you do not owe any federal taxes. Under the current law, an heir is not required to pay a federal tax when they receive an inheritance. 

This is especially important to understand when it comes to inheriting real estate. This is because of the capital gains tax that exists on real estate. Normally, if a child received real estate as a gift from their parent while the parent is a live, the child would also receive the parents cost basis in the real estate. In other words, if the parents bought a piece of property for $10,000 and when it was gifted to the child it was worth $100,000 the child receives the $10,000 cost basis. If the child were then to immediately sell the property for $100,000, there would be a $90,000 capital gain and the child would have to pay the capital gains tax on that property which could be 20% or more.  

However, if the child inherits the property after their parent’s death, the child will be able to enjoy a step-up in basis of that property. The step-up would be the market value of the property on the day the child inherited it from their parent. If the child then goes to sell that property for the same $100,000 market value, the step-up in basis would still be $100,000 which means there is no capital gain. Because there is no capital gain, there is no capital gain tax that needs to be paid. 

The other thing to be aware of when it comes to federal taxes is that if the parent’s estate is wealthy enough to be above the current federal lifetime exemption amount, then the estate itself may have to pay a federal tax before any property or money in the estate is distributed to the children who inherit the estate. 

Currently, for an individual, the lifetime exemption is around $11.5 million. So, if a parent’s estate was worth $15 million, then there would be an estate tax on the $3.5 million amount from the estate above that amount. The estate would be required to pay a tax on this amount prior to making a distribution to the surviving children. Then the surviving children receive the inheritance, and there is no tax that they are required to pay. 

When it comes to Idaho State inheritance taxes, they simply reflect the federal tax requirements. In other words, when a wealthy estate is involved, there could be a state tax associated with the amount that is above the lifetime exemption the same as there would be a federal tax. 

The most important thing to understand is that in the state of Idaho there is no actual inheritance tax that is owed before an heir would receive money, property, or other assets from an estate. Just as with the Federal taxation process, the estate would be required to pay any existing state taxes before any distributions are made to any heirs. As a result, the heirs themselves will owe no taxes. 

As you can see, an heir actually has very little ability to determine whether an estate will have to pay any taxes. This responsibility rests with the person who owns the estate. If they are wealthy, then they should take steps to avoid any applicable taxes that might exist on their estate when they die. 

If you have questions or concerns about taxes or any other aspect of estate planning or probate and Idaho, we encourage you to contact us for a free 30-minute consultation where we can answer your specific questions. Additionally, we encourage you to download our free Estate Planning Questionnaire to help you get started with your own estate planning needs. This is an easy to fill out form that allows you to pull together all the information you need to think about when it comes to creating your own customized estate plan. Through the questionnaire and our free consultation, we have assisted numerous clients in talking about, planning for, and creating their own customized estate plan. We’ve also help numerous clients understand the steps and procedures that apply during a probate in Idaho. We are confident that we can help you too with your specific needs! 

Our team of Idaho lawyers can help you with any of your estate planning or probate needs. Whether you are seeking to create or review an estate plan for yourself or would like to help a loved one, we are available to discuss your options and answer your questions at an initial free 30-minute consultation. Call us toll free at 877-232-6101 or 208-232-6101 for a free consultation. You can also email us directly at lane@racineolson.com or stop by our office at 201 East Center Street, Pocatello, Idaho 83201. We will answer your questions and help you solve your Idaho Estate Planning problems.