When someone passes away, there are three separate taxes to consider: property taxes, income taxes and inheritance taxes. Here is some general information concerning these taxes, however, I am not a C.P.A. or a tax professional. For further information or tax advice, please see a qualiﬁed tax professional.
As most California property owners know, any increase in our property taxes from year to year is relatively small thanks to Proposition 13. Generally speaking, if real estate is transferred between spouses, children and parents or, in some limited circumstances, grandparents and grandchildren, the recipient of the property continues to enjoy the Proposition 13 tax base.
The beneﬁts of Proposition 13 can be lost, however, if there is a “change of ownership” within the deﬁnition of the State rules. Examples of this are transfers of property between siblings, more distant relatives or friends.
When someone passes away and his or her assets continue to earn income during the time the estate is being administered, income taxes may be imposed on the estate. After death, a person’s social security number can no longer be used and income from his or her estate is reported under a new tax identification number obtained from the IRS. There are normally two returns due the year after a person dies. The ﬁrst return is the deceased person’s personal return and covers the period from January 1st to the date of death. The second return, called a “ﬁduciary return”, will cover the period from the date of death through December 31st. An estate is a taxable entity separate from the deceased person and it exists until the ﬁnal distribution of estate assets is completed. While it exists, tax returns must be ﬁled for the estate. If the income for the year has been distributed to beneficiaries, the income is reportable by each beneﬁciary on his or her individual income tax return. If the income has been retained in the estate, the tax on the income is payable by the estate.
The third type of tax that may be imposed on a deceased person’s estate is called the federal estate tax, or inheritance tax. The tax is assessed according to the tax rate in effect the year a person dies. In 2001 estate taxes were imposed on estates greater than $1,000,000. This amount gradually rose over the next decade so that in 2009 taxes were imposed only on estates over $3,500,000. Due to the expiration of a Bush-era law, there was no inheritance tax in 2010. For those dying in 2011 and after, taxes will be imposed on estates over $5,000,000 unless Congress changes the law.
Here is the trouble part. When property taxes remain unpaid, eventually the County will get around to selling the property in order to collect the tax. When either income or estate taxes are not paid, or paid late, penalties are extremely high and the taxing authorities can go after either the decedent’s estate or any beneﬁciary who received his or her money before taxes were paid.
© 2017 by Marlene S. Cooper. All rights reserved.
(Marlene S. Cooper, a graduate of UCLA, has been an attorney for over 35 years. Her practice is focused entirely on estate planning, estate administration and probate. You may obtain further information at www. marlenecooperlaw.com, by e-mail at Marlene@MarleneCooperLaw. com, by phone at (626) 791-7530 or toll free at (866) 702-7600. The information in this article is of a general nature and not intended as legal advice. Seek the advice of an attorney before acting or relying upon any information in this article).