Receiving a gift in someone’s Last Will and Testament often causes conflicting emotions. The gift itself may be appreciated, even needed; however, the reason for the gift is certainly not cause for celebration. One practical question that beneficiaries often have when they receive an inheritance is “Do I pay taxes on a gift someone left me in a Will?” As a general rule the answer to that question is “no”.
The Internal Revenue Service Code requires a tax to be paid on most gifts that are made. According to the IRS rules, almost anything you gift to someone is subject to the gift tax. For the average taxpayer, however, a tax will never actually be due because of the lifetime exemption for gift and estate taxes and/or the annual exclusion. When you die, your estate assets will be valued. The total value of your estate will then be added to the total value of all countable gifts made during your lifetime. If the total of the two exceeds the lifetime exemption limit (set at $5 million and adjusted annually for inflation making it $5.34 million for 2014) your estate will owe gift and estate taxes. This is how any tax due is paid on a gift. Therefore, if you are left a gift in someone’s Will, the estate of the person who left you the gift will pay any applicable tax on the gift. The same is true for any state gift tax that might be due on the gift – the donor’s estate will be responsible for paying the tax. Under certain circumstances, the recipient of a gift may agree to pay any taxes due on the gift; however that exception to the general rule would not apply to a gift left in a Will.
Although you will not be responsible for paying taxes on a gift at the time you receive the gift you could end up paying taxes on the gift down the road in the form of capital gains taxes. As the recipient of a gift you will also receive the donor’s basis in the property. The basis is typically what the donor paid for the asset. This could result in a considerable capital gains tax down the road. If, for example, you are gifted a house that the donor paid $50,000 for 30 years ago and is now worth $400,000 you would owe capital gains tax on $350,000 if you were to sell the home.
The Law Offices of Barton P. Levine is a member of the American Academy of Estate Planning Attorneys.