After recently writing a post about the estate of James Gandolfini, I ran across a follow-up article for Reuters by Amy Feldman titled: “What to Do When You Inherit a Tax Mess.” This article focuses on the types of tax mistakes people make when planning their estate that can inadvertently cause future tax chaos for beneficiaries.
Here are some key points about estate tax issues the article highlights:
- Every one in 10 estates has some tax issues running the gamut from unpaid federal or state tax debt to a surprise estate or inheritance taxes due.
- State estate taxes typically kick in at levels far below the $5.25 million federal estate tax trigger.
- State residence can trigger residency tax issues that can be avoided if a lawyer clarifies what state they have ties to. This is particularly important for those who retire to a different state. Many of these tax problems, the article states, may be avoided with proper tax and legal advice suggesting taxpayers stop voting in the former state, change their driver’s license and otherwise cut legal ties.
- State inheritance taxes are levied directly on beneficiaries rather than on estates. According to Scott Cripps chief fiduciary officer and head of trust services Bank of the West in San Francisco, the taxing authorities go to the front of the line when the estate goes to settle and if not done right, can take a big bite out of the estate.
- Unreported offshore bank accounts – The article shares an example of a husband who was left $5 million in a Swiss bank account by his wife after she died that he never knew about. This surprise windfall meant the widower had to hire lawyers to file the proper FBAR reports, and most likely pay steep IRS penalties and fines all because those millions had never been reported to the IRS.
- Unexpected tax debt - Beneficiaries could initially have close to equal amounts before the taxes but vastly different amounts afterward. Example: one beneficiary receives an income tax free life insurance policy; the other an Individual Retirement Account (IRA) that is subject to taxes.
Tax problems can be avoided in advance if the estate is set up properly. In order to achieve this, the article suggests benefactors need to understand the state estate tax rules and take them into account during the estate-planning process. Additionally, beneficiaries at that time should bring up their financial concerns – including any tax implications that could directly affect them.
During discussions about life and death, the subject of taxes is not a high priority for many families especially as health and well-being issues often overshadow future tax considerations. Nevertheless, the conversation still must be had to mitigate “surprises” especially since most families don’t want to tax burden their loved ones after they are gone.
If you have inherited tax troubles such as an estate that owes back taxes or has unfiled tax returns, you will need to hire a qualified tax professional or a lawyer to help you unwind the mess and get you back into compliance.
More Tax Help, IRS News and Tax Relief Tips:
- Swiss Bank Wegelin Avoids Court Appearance
- Tax Relief Weekly News Round-Up
- Swiss Pressured to Reveal All Offshore Accounts
- Treasury Proposes Multilateral Agreement for Offshore Compliance
- IRS Help for Americans with Foreign Income