Dear Liza: My cousin passed away in 2011, and she had a revocable living trust. My cousins inherited the assets 50/50. The assets were stocks. Do my cousins have to file income tax returns for what they received? Also, am I required to file an income tax return for the trust? Your cousins inherited the stocks at their value on the date your cousin died in 2011. Inheritances are NOT ordinary income under the federal tax code, so they receive those assets free of federal income tax. (We have a federal estate tax; if any tax was due, it would have been on your deceased cousin’s estate, if she owned more than $ 5 million in assets when she died.) Seven states have an inheritance tax, so they’ll need to check on whether any state inheritance tax is due. Your two cousins will be responsible for filing income taxes on any dividends they received after inheriting the stocks, and for any capital gains earned when they sell that stock if it has appreciated since they inherited it. You, as Trustee, would be responsible for filing a trust income tax return (Form 1041) if the trust earned more than $600 worth of income between the time your cousin died and the time the trust assets were distributed to the beneficiaries.
Tag Archives: capital gains tax
Dear Liza: My friend has a stock portfolio she wants to give me before she dies. She had cancer and only has a few months to live. She wants to give it to me now to avoid the whole estate thing. The total is about $220,000. Do I have to pay gift tax if she transfers the portfolio to me in kind? I am sorry to hear that your friend is so ill. She can give you that portfolio, but it might not be the most tax-effective way to do it. If she gives you the portfolio before she dies, she (or her estate) must report the gift on a gift tax return by April 15th of the following year. She won’t owe any gift tax on the transfer, because in 2012, each of us can give up to $5.12 million dollars free of gift tax, but any gift over the annual gift tax exclusion amount of $13,000 must be reported on that gift tax return. If you later sell any of that portfolio, though, you will owe capital gains taxes on the difference between your friend’s basis in that stock and the sales price. For example, if your friend owned stock in Y Corp., that she purchased for $1 dollar a share in 1982, and that stock is worth $100/share in 2013, you will owe capital gains on that $99/share rise in value. Alternatively, if she gives you that portfolio upon her death, you will inherit it at the current fair market value for capital gains tax purposes. In other words, if that Y Corp. stock is worth $100/share when your friend dies, and you later sell it at that price, you will owe zero in capital gains taxes. That portfolio will, however, be part of her taxable estate at her death, so, depending upon her other assets, her estate may or may not have to pay estate tax on those assets. (Currently, she can give up to $5.12 million at death free of estate tax.) So, you and your friend should seek the advice of an accountant to see whether it makes sense for your friend to give you that stock via a Will or a trust upon her death, or during her lifetime.
Hi Liza, I read from FAQ on the nolo website, “The $5 million exemption applies to property you give away during life or leave at your death. In other words, you can transfer, either while you are living or at your death, up to $5 million of property tax-free.” So, does it mean that I can pass a $1 million house to my children without any costs? now? If yes, what time is used as the tax basis? Yes, until the current law expires at the end of 2012, you could absolutely give that house to your children free of gift tax. But they would also get YOUR basis in the house for capital gains tax purposes. In other words, if you purchased that house for $25,000 in the 1970’s and now it’s worth $1 million, if you give that house to your kids, and they sell it, they will owe capital gains taxes on all of that gain. If you give them the house only upon your death, their basis in that property would be the fair market value of the property at your death, so all of that gain goes away. If you make the gift now, also, don’t forget to file a gift tax return by April 15th of the following year. You are still required to file that return, even though no tax is due.