CPA help to avoid taxes on death inheritance

[Elvis 3375]

My father passed away and left a little money to me and my two siblings.  It should work out to be a bout $45k each.  My sister is the only listed beneficiary, so the funds will flow to her then to me and my brother by checks written from her to us.  We are listed in the will as equal thirds in the will.  The $135k comes from 3 sources: $100k life insurance, $50k in an unsual real estate deal, and $15k in cash; minus $15k in funeral expenses.

I'm pretty sure my sister isn't going to a have an income tax exposure, but I'm concerned my brother and I will be subject to income tax on the $45k each.  

Is there anything we can do to shield the inheritance from taxes?  Am I overthinking this?

[TwiceHorn 31549]

You need to file a final tax return and an estate tax return, which would show that the amounts coming to you ar by reason of death, which will make them tax free. 

[NeverMarryAStripper 21942]

You need to get your facts straight.  At first you say your sister is the only beneficiary, then you say the will list each of you with a third.  It makes a difference.  The life insurance is completely different than the will.  It will have a named beneficiary completely outside of any will.

Edited January 24, 2023 by NeverMarryAStripper

[Elvis 3375]

Thanks.  This is all way out of my knowledge base.

My sister is listed as the only beneficiary on the life insurance.  The will says we split everything three ways.

@TwiceHorn, is it really that simple.  Next year, I just say it was due to death and it's all tax free?  I realize that this is not a lot of money, so I wouldn't be suprised if that's the case.  You stated two different tax returns.  Do I need a CPA?  Or is this pretty easy on turbotax?

[TwiceHorn 31549]

2 hours ago, Elvis said:

Thanks.  This is all way out of my knowledge base.

My sister is listed as the only beneficiary on the life insurance.  The will says we split everything three ways.

@TwiceHorn, is it really that simple.  Next year, I just say it was due to death and it's all tax free?  I realize that this is not a lot of money, so I wouldn't be suprised if that's the case.  You stated two different tax returns.  Do I need a CPA?  Or is this pretty easy on turbotax?

Well NMAS is right, the life insurance passes outside of the will, entirely. The other things would pass according to the will in an informal, non-probate distribution.  All transfers on death occur tax free, whether by will or POD/Beneficiary designation.

It may be that the insurance secondary, voluntary distribution turns out to be a gift.  It will still be tax free to you, but may reduce sisters' lifetime gift exemption.

The final tax return accounts for any of your father's taxable income in the last tax year of his life.  The estate tax return is generally what establishes where the estate went and whether it was taxable and why it was not.  It also is the document that establishes stepped-up basis for assets.  I wouldn't try an estate tax return on your own.

Edited January 24, 2023 by TwiceHorn

[Nice Guy Eddie 13528]

Does sis get the full insurance payout, and then the remainder is split in thirds?

[Sawbonz 27595]

[Brew 3049]

You don’t need an inheritance tax return. The life insurance goes to the sister the other is split based on the will technically, but most people would ignore it. There is no income tax impact to any of you based on the  facts presented. You do have a gift tax issue technically between your sister and you two for the split of the insurance she signs over. 99% of people would ignore it and claim it was split according to the estate, technically she needs to file a gift tax return.

[TwiceHorn 31549]

33 minutes ago, Brew said:

You don’t need an inheritance tax return. The life insurance goes to the sister the other is split based on the will technically, but most people would ignore it. There is no income tax impact to any of you based on the  facts presented. You do have a gift tax issue technically between your sister and you two for the split of the insurance she signs over. 99% of people would ignore it and claim it was split according to the estate, technically she needs to file a gift tax return.

I have done two estates (parents) substantially under the estate tax exemption, so no real worries about that.  Stepped up basis in some assets (real estate) was an issue, though.  Estate tax returns were done, as they were in friends' relatives probates, all substantially under the estate tax exemption.

Is there some kind of de minimis exception for estate tax returns?

[Quagmire 2147]

Why should a trust a smart banker like you? So I can end up in here ?

[Brew 3049]

37 minutes ago, TwiceHorn said:

I have done two estates (parents) substantially under the estate tax exemption, so no real worries about that.  Stepped up basis in some assets (real estate) was an issue, though.  Estate tax returns were done, as they were in friends' relatives probates, all substantially under the estate tax exemption.

Is there some kind of de minimis exception for estate tax returns?

We rarely file estate tax returns unless there is a taxable estate, one is required in a probate situation, or it is borderline taxable based on arguable valuation amounts. There is no requirement to file by the IRS unless taxable. However, you still need determinations of value to set inherited value without the estate tax return.

[Patron 230]

Does anybody know if I have to have Waiver of Notice notarized or can I just sign the document.

[TwiceHorn 31549]

1 hour ago, Brew said:

We rarely file estate tax returns unless there is a taxable estate, one is required in a probate situation, or it is borderline taxable based on arguable valuation amounts. There is no requirement to file by the IRS unless taxable. However, you still need determinations of value to set inherited value without the estate tax return.

I don't think Texas requires one, but it does require an Inventory and Appraisement in probate that contains most of the information in an estate tax return, so we filed it to have the basis values of record rather than having to submit the Inventory to the IRS on sale.  That seems to be fairly common practice around here.

[Jerry Callo 8732]

Be nice to your sister.  The life insurance proceeds are hers as the sole beneficiary - the will has nothing to do with it.  It is her decision if she wants to split the life insurance proceeds with you and your brother.

[Elvis 3375]

My sister is cutting checks to me and my brother for $3500 tomorrow to clean out most of the cash.  Any reason not to take the check?   Thread advise sounds like I'm good.

[futureman 22552]

sorry about your dad. 

[Fudge Nuggets 19227]

Sounds like you're going to be fine.  If it was some big stakes money then my advice would be to bribe your congress critter.

[BearSchlong 8115]

My dad’s life insurance beneficiary was “the estate of,” which is why we had to probate. But his stocks were paid to my stepmother who had UBS split the proceeds into 2 additional accounts that were then assigned to my sister and me. She will have to account for the gift, right, even though it was done er dads wishes?

His will was very specific, and my stepmom and I were co-executors so it went really smoothly.

[Anwar Namtut 344]

Generally speaking, assets transfer from the deceased to beneficiaries tax-free as noted above. The thing I tell people to watch out for are things like IRAs or 401ks that have not yet been taxed. Those will be taxable to the recipient. They usually have designated beneficiaries similar to life insurance and pass to the beneficiaries outside the authority of a will.

From your description, it sounds like you are good.