Attorney & Mediator
Attorney & Mediator


I am often asked by clients about taxes when it comes to inheritances and gifts.  There seems to be confusion about what gets taxed, when and why.

Income taxes are imposed on the money that you earn, either through wages, or through income from your investments

Inheritance taxes or estate taxes are upon what you own and give away during your lifetime or at your death.

First, there is no income tax to the recipient of gifts or inheritances.  Just as with life insurance, the money passes to the recipient or beneficiary income tax free.

There is one exception to this rule.  When a beneficiary receives all or part of an IRA or 401K, there is income tax as the money is withdrawn.  This is not because it is an inheritance but rather because the money was never taxed in the first place.  For IRAs and 401K’s, whoever withdraws the money pays the tax.

Inheritance and gift tax is levied against the estate or the individual who makes the gift.  We are each allowed an exclusion amount of $5 Million.  Therefore, no tax will be paid on the first $5 Million that each of us gives away during lifetime or at death.

So why do we worry about the $14,000 per year limit of gifts?  In order to keep track of what we give away during our lifetimes, we must file a Gift Tax Return with the IRS.  Therefore, if you gave away $100,000 per year for 20 years, you would have gifted away $2 Million.  Thus at death, you could only give away an additional $3 Million before taxes would be imposed.

The exception to this rule is that we can gift $14,000 to each person that we chose to in any given year without filing a gift tax return.  If you made 10 gifts of $14,000 each, you would gift away $140,000 without filing a gift tax return.  If you need to give more money to an individual in a calendar year, you won’t have to pay tax on the money; however, you will have to file a Gift Tax Return.

For most of us, we don’t have to worry about exceeding the limit of taxable gifts.  It is just a matter of knowing the rules and keeping track.

Estate Tax and the Fiscal Cliff?

While we were getting dangerously close to flying over the fiscal cliff, those in the estate planning sector were watching closely.

The estate and gift tax, which taxes what you own and pass on to others either during your lifetime as a gift, or at death as a bequest, was in flux.  At the end of 2012, the tax which gave every individual a $5 Million exempt amount prior to the imposition of tax, was in danger of reverting to $1 Million per person.  Additionally, the tax rate would have gone up to 55%.

Many may think that $1 Million is a sufficiently generous amount.  However, it would have had adverse affects upon many family owned businesses and farms.  These individuals don’t live like the wealthy, however, the value of their businesses or farms, which include all of their equipment, would have placed their estates over $1 Million.  In such an instance, the family would then, upon the death of the owner, have to sell the business or farm because they did not have enough money to pay the estate taxes due.

In the end, lawmakers preserved the $5 Million exempt amount per person but did change the tax rate from a maximum of 35% to 40% on the amounts over the exempt amount.

So, who’s estate is now taxable?  For taxpayers dying in 2013, the estate tax exclusion amount as adjusted for inflation is now $5.25 Million per person.  For all amounts over that, the estate tax will be levied at a maximum rate of 40%.