TAXES & COSTS
After Death
We’ve found there is a lot of confusion when it comes to taxes after someone dies. In many cases, people are pleasantly surprised to discover that the tax burdens are not what they originally feared.
When a person dies, several types of taxes may come into play depending on the value of their estate, their location, and the nature of their assets. Here is a breakdown of the key types of taxes that may need to be addressed after death:
01. Estate Tax
What It Is: A tax on the total/gross value of the deceased person's estate before it is distributed to beneficiaries. This could include cash and securities, real estate, insurance, trusts, annuities, business interest, lifetime gifts and other assets.
The Gross Estate will likely include probate as well as non-probate property.
Who Pays It: The estate itself pays the estate tax.
Federal Estate Tax: In the U.S., the federal estate tax applies only if the value of the estate exceeds a certain threshold. As of 2023, the exemption amount is $12.92 million per individual ($25.84 million for married couples). Estates valued below this threshold do not owe any federal estate tax. The tax rate for amounts above the threshold can be as high as 40%.
02. Inheritance Tax
What It Is: A tax imposed on individuals who inherit money or property from a deceased person's estate.
Who Pays It: The beneficiaries of the estate pay the inheritance tax, not the estate itself.
In Kentucky, the state may impose an inheritance depending on the deceased relationship to their beneficiary. The tax rate depends on the relationship. Kentucky does NOT impose inheritance tax on assets left to a spouse, children/stepchildren, grandchildren/step grandchildren, parents or siblings.
03. Income Tax
of the Deceased
Final Income Tax Return: The deceased person’s executor or administrator must file a final income tax return for the year in which the person died. This return covers income earned from January 1 up to the date of death.
Income Earned After Death: If the estate continues to generate income (e.g., from investments or rental properties), the estate itself may need to file an income tax return (Form 1041 in the U.S.) for any income earned after death until the estate is settled.
04. Capital Gains Tax
What It Is: A tax on the profit from the sale of assets.
Step-Up in Basis: When someone dies, their assets typically receive a "step-up" in basis to the market value at the time of death. This can minimize capital gains taxes when the heirs eventually sell the assets. This often results in heirs not having to pay capital gains taxes on assets sold shortly after death.
Heirs Selling Assets: If heirs sell assets that have appreciated since the date of death, they may owe capital gains tax on the difference between the stepped-up basis and the sale price.
Lifetime Exemption: The U.S. federal government allows a certain amount to be gifted
during a person’s lifetime without incurring gift taxes (currently up to $18,000 million as of 2024).
05. Gift Tax
What It Is: A tax on gifts made during a person’s lifetime.
Lifetime Exemption: The U.S. federal government allows a certain amount to be gifted during a person’s lifetime without incurring gift taxes (currently up to $18,000 million as of 2024). If the deceased person made significant gifts during their lifetime that exceeded annual exclusions, these amounts may be counted against the estate tax exemption.
06. Trust-Related Tax
What It Is: Taxes related to assets held in a trust.
Grantor Trusts: Trusts that are considered part of the grantor's estate may be subject to estate taxes. If the trust generates income, it may also be required to file an income tax return.
Professional Guidance: Due to the complexity of tax laws, it is often advisable
to consult with an estate planning attorney or a tax professional.
07. Real Estate Tax
Property Taxes: If the deceased owned real estate, property taxes may still need to be paid on those properties until they are sold or transferred to heirs.
However, in most cases there will not be capital gains taxes.
Call Today 502.425.8717
08. Retirement Accounts (IRAs, 401(k)s)
Tax-Deferred Accounts: If the deceased had tax-deferred retirement accounts (like traditional IRAs or 401(k)s), the beneficiaries may owe income taxes on withdrawals, depending on the account type and beneficiary status.
Required Minimum Distributions (RMDs): Beneficiaries may need to start taking required minimum distributions from these accounts, which are subject to income tax.
09. Foreign Taxes
What It Is: Taxes imposed by foreign countries if the deceased owned property or had financial interests abroad.
Who Pays It: The estate or beneficiaries, depending on the laws of the foreign country.
Key Considerations
Estate Planning to Minimize Taxes: Effective estate planning strategies can help reduce the tax burden on an estate.
State Laws: Tax rules vary significantly from state to state, so it’s important to consider state-specific laws and exemptions.
Professional Guidance: Due to the complexity of tax laws, it is often advisable to consult with an estate planning attorney or a tax professional.
Knowledgeable
& Friendly Service
QUESTIONS? WE’RE HERE TO HELP!
Contact the probate attorneys of The English Law Group, P.S.C. to arrange your initial consultation. From our offices in Louisville, we can help settle estates in Jefferson County, and throughout North Central Kentucky, and Southern Indiana.