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By: Scott Grossman on February 20th, 2024

Do Beneficiaries Have to Pay Taxes on Inheritance?

The probate process requires precision, patience, and knowledge of all the laws. That is why The Grossman Law Firm is here to help. For over twenty years, we have been guiding our clients through the probate process every step of the way.

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California Estate Tax Laws

In this article, we’ll focus on if beneficiaries have to pay taxes on inheritance? Whether you are an executor, a beneficiary, or simply interested in learning more about estate planning, this article will provide you with the critical information you need. 

California Inheritance Tax

One of the first things to understand is that California does not have a state inheritance tax. Inheritance tax is a tax imposed on the transfer of assets from a deceased individual to their beneficiaries. Some states have inheritance taxes, but California is not one.

However, it’s essential to be aware that even though there is no inheritance tax in California, there may still be federal estate tax to consider. The federal estate tax is a tax on the transfer of an estate after death. It applies to estates that exceed a specific value, which changes over time. So, do beneficiaries have to pay taxes on inheritance?

Do Beneficiaries Have to Pay Taxes on Inheritance? Do Beneficiaries Have to Pay Taxes on InheritanceAs of 2024, the federal estate tax threshold is $13.61 million per individual. That means that no federal estate tax will be owed if the estate’s total value is below this threshold. For a more in depth look at California Estate Tax, check out the article “California Estate Tax: Everything You Need to Know,” on Smart asset. A site dedicated to giving you accurate and fact checked finical information. 

Taxes on Trust Property

Understanding the tax implications of trust property is crucial for both trustees and beneficiaries. In California, trusts can be subject to various taxes, including federal income tax, state income tax, and possibly estate tax. However, taxes depend on the structure and terms of the trust. Trust income, such as dividends, interest, or capital gains, must be reported on the trust’s tax return, and taxes are paid at the trust level if the income is retained within the trust. However, if income is distributed to beneficiaries, they may be responsible for reporting and paying taxes on their individual tax returns. 

Additionally, trust property may be subject to property taxes, and if the trust sells property, capital gains tax may apply. Understanding these tax obligations is essential for ensuring compliance and efficient trust administration. Consulting with a tax professional or attorney experienced in trust and estate law can help navigate these complexities and minimize potential tax liabilities.

If you’d like more information on trust property, check out our articles “Tax Implications of Transferring Property into a Trust,” “Understanding Trust Property: Examining the Hidden Risks and Limitations,” and “Can a Trustee Purchase Trust Property?” for a more comprehensive resource on your rights.

Tax implications of inheritance

While there may not be an inheritance tax in California, there are still essential tax implications to consider for both the estate and the beneficiaries. Let’s take a look at some key factors:

Estate Taxes

As mentioned earlier, the federal estate tax applies to estates that exceed the threshold determined by the Internal Revenue Service (IRS). If the estate’s value exceeds the threshold, estate taxes must be paid. However, certain deductions and credits are available that can help reduce the overall estate tax liability.

Income Taxes

Beneficiaries of an inheritance in California typically do not have to pay income taxes on the inherited assets. That is because inherited assets are generally not taxable income for individual beneficiaries. However, if the inherited assets generate income (e.g., rental properties, investments), that income may be subject to income tax.

Step-Up in Basis

One important aspect of inheritance and taxes is a “step-up in basis.” When someone inherits an asset, such as a house or stocks, the tax basis of that asset is “stepped up” to its fair market value at the time of the original owner’s death. That means that if the beneficiary decides to sell the inherited asset, they would only pay capital gains tax on the increased value from the stepped-up basis.

For example, let’s say your great-aunt passed away and left you her house. Your great-aunt originally purchased the home for $200,000, but at the time of her death, it was worth $500,000. If you decide to sell the house for $550,000, you would only pay capital gains tax on the $50,000 increase in value from the stepped-up basis of $500,000 rather than the $350,000 increase from the original purchase price of $200,000.

Taxes on Gifts

Sometimes, individuals may gift assets to their heirs while still alive. It’s important to note that gifts above a specific value may be subject to federal gift taxes. However, most individuals do not need to worry about gift taxes, as the IRS allows for an annual exclusion amount. As of 2021, the annual exclusion amount is $15,000 per individual. That means that an individual can gift up to $15,000 per year to an individual without incurring gift taxes.

It’s essential to consult with a qualified tax professional or estate planning attorney to understand your unique situation’s specific tax implications. Laws and regulations can change, so staying current with the latest information is crucial.

In conclusion, while beneficiaries generally do not have to pay taxes on inheritance in California, there are still essential tax considerations to remember. Understanding federal estate tax laws, income tax implications, step-up in basis rules, and potential gift taxes can help you make informed decisions regarding your inheritance. If you have specific questions or concerns about your situation, it’s best to seek professional advice.

We hope this article has provided a helpful overview of the tax implications of inheritance in California. Remember, estate planning is a complex area, and it’s always a good idea to consult with professionals who can guide you through the process and ensure that your assets are protected and distributed according to your wishes.

Is Your Inheritance at Risk?

A breach of fiduciary duties by a trustee can have severe consequences for the trust and its beneficiaries. When a trustee fails to adhere to the principles of OLDCAR—obedience, loyalty, disclosure, confidentiality, accounting, and reasonable care—they compromise the integrity of the trust administration. For instance, if a trustee mismanages funds, acts in their interest rather than that of the beneficiaries, or fail pay taxes on trust property, they undermine the trust’s purpose. They can cause financial harm and distress to the beneficiaries. Such breaches violate legal obligations and erode the trust placed in the trustee, potentially leading to legal actions and the removal of the trustee from their position.

Beneficiary Rights in California

If you would still like more information on what exactly qualifies as a breach of fiduciary duty, check out our article “20 Ways Your Trustee can be breaching their fiduciary duties” on our website. If you have more questions about your beneficiary rights and what you should know moving forward. 

Probate Process

It is vital to hire a probate attorney in California. Their expertise, guidance, and knowledge of California probate laws are invaluable throughout the probate process. Whether you are an executor, beneficiary, or concerned family member, TGLF can assist you. We have guided our clients through litigation, allowing them peace of mind for over 20 years.

By seeking the assistance of a probate attorney, you can navigate the complexities of the probate process with confidence and peace of mind. If you need more guidance in the probate process, check out our Overview of the California Probate process.

If your case is in California and you’d like an honest opinion, fill out our Get Help Now form. Or contact our office today to schedule your free 30-minute phone consultation by calling us at (888) 443-6590.