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Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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My father died last year, and my mother is 87 years old. We

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My father died last year, and my mother is 87 years old. We need precise, straight forward tax advice as to whether to transfer all property to me prior to my mother's death and just pay the taxes in 2010, or wait until her death and get socked with death tax, inheritence tax, and income tax all at once. Please understand that I currently earn less then $10,000 this year. I need sound advice on how best to preserve the assets from the tax hogs of the USA. There are approximately $600,000 in assets. Please recommend a Tax advisor we can go to in the greater Fort Lauderdale area for help. I dread the thought of having to sell the roof over my head just to pay the Obama blood hounds. I am tired of getting the run around when I casually try to address this issue at H & R Block, with financial planners, and our attorney. I feel this is a disgrace. We want to know up from what the liabilities are upon her death and how to best approach this.
Hello Nittany,

I am at a loss to understand why this question would have been so difficult for anyone at H & R Block to answer for you because it is a rather simple question.

If you wait until the time your mother passes away and then you inherit her assets, your estimated tax liability at that time would be zero, unless some of her assets are held inside of an IRA account or other tax deferred account. If that were the case, then you would owe regular income taxes on that money only at the time it was withdrawn.

In the United States, there is no inheritance tax at the federal level and the state of FL also has no inheritance tax. Instead of an inheritance tax, the US imposes an estate tax (or as you referred to it the "death tax"), but that only applies to estates which exceed a certain value. Currently that value is set a $3.5 million. For next year in 2010, the estate tax is repealed entirely. And then starting in 2011, the estate value drops to $1 million as the value which is exempt. So as long as your mother's estate does not exceed $1 million, then you would never owe any estate taxes on her assets.

Also, if she owns a home or other real estate property that you will eventually inherit, then if you receive that property through inheritance, you will automatically receive a "stepped up" basis in the property at the time you inherit it. What that means is that your new basis in that property would be whatever the fair market value was on the day your mother passes away. And while you would not owe any inheritance tax on the value of the home itself, you would owe capital gains tax if you sell the property, but the tax would only be on any gain you had from the sale. The gain would be figured by taking your selling price less your new stepped up basis. So as you can see, receiving a stepped up basis on property is quite an advantage, as you will not have to use your mother's original basis in determining the gain.

Because of the stepped up value which is allowed on property received through inheritance, it would not be recommended that you transfer any property to your name prior to her death. Doing that would be considered a gift, and with a gift you would retain the same basis as your mother currently has, which means you would have a much larger gain when you eventually sell the property.

This same stepped up basis applies to any stocks your mother may own. If you inherit stocks your new basis automatically becomes the fair market value on the day she passes away. So here again when you would sell those stocks, you would have a much smaller gain to pay taxes on.

As I said earlier, the only assets which might be subject to regular income tax would be if your mother as money inside of an IRA account or similar tax deferred account. Money in that type of an account would be taxable to you in the year you withdraw it becaus none of that money has ever been tax paid. But this is the only thing you would really have to pay tax on if your mother's estate is below the values I listed earlier in this post.

If this was helpful please press the Accept button. Positive feedback is also appreciated.

Thank you Nittany and let me know if you have more questions.

Customer: replied 7 years ago.
This is very helpful. The property and the annuity are in a trust which I am the beneficiary of. So is the checking account. There are no IRA's or retirement accounts. I assume the fact that the assets are in trust does not affect the outcome above. Is this true? The lawyer insists it is not necessary to put the annuity in the trust since it will not go to probate when my mother dies. Is this true? Why is this true of annuities but not property such as houses? Moreoever, a book I read points out that "You may be worth more than you think", indicating the jewelry and paintings etc., contribute to your estate. How would anyone know what jewelry we have??? This seems mysterious to me.
Hello again Nittany,

First, there is one thing I would like to point out. The annuity which your mother owns will be partially taxable when you cash that in. As I mentioned to you earlier, money held in an IRA or other tax deferred account is subject to regular income tax when you withdraw it.

An annuity is a partially tax deferred account. An annuity is initially purchased by someone with tax paid money, and then the annuity is allowed to earn money on a tax deferred basis. So the portion your mother originally contributed to purchase the annuity would not be subject to tax, but any earnings on that account since she made the purchase would be subject to regular income tax when the money is withdrawn.

The same rules that I can you earlier will still apply whether the assets are held inside out outside of a trust.

As far as the annuity not being part of the trust, it would not be necessary because you are listed as a direct beneficiary of the account. Property would not have you listed as a direct beneficiary, but rather through the will.

Regarding jewelery, paintings and other such assets -- when someone passes away it is the responsibility of the estate's executor or personal representative to place a value on all items owned by the deceased. So the IRS would not necessarily know about items of this nature, but the executor is required to list them as part of the estate valuation if he knows they exist.

But as I mentioned earlier, if your mother's estate ends up being below the exemption allowed before estate tax kicks in, then none of this should really be an issue for you.

If this was helpful please press the Accept button. Positive feedback is also appreciated.

Thank you Nittany.

Merlo and other Tax Specialists are ready to help you
Customer: replied 7 years ago.
Thank you very much. You are very helpful. I really do appreciate your well presented answers. Now I have a basis of information to build upon. Best regards.