Answers to Common Questions About Taxes and Your Florida Estate or Trust

When it comes to Florida estate planning, we often think about questions like, “Who will take care of my children?” or “Who will inherit my property?” We usually do not think about some of the secondary legal issues that may arise in the course of administering our trust or estate, such as, “Do I still have to pay taxes after I die?”

Will You Owe Money After You Die?

Not surprisingly, the answer to this last question is generally, “Yes.” Tax liability does not magically disappear when you die. That said, your trust or estate’s actual tax liability may not be all that significant.

Let’s get one thing out of the way first. You have probably read about the “estate tax” or “death tax.” Unless you plan to leave an eight-figure estate, this is simply not something you need to worry about.

So what tax issues will affect your estate? Well, if you earned taxable income during the year that you passed away, your personal representative will need to file a final tax return (i.e., a Form 1040) with the Internal Revenue Service. Fortunately, Florida does not have its own income tax, so no state return will be due.

Your estate may also need to file a separate income tax return–a Form 1041–if it receives more than $600 in gross income. Keep in mind your assets, such as interest-bearing bank accounts and rental properties, may continue to earn income after your death. This income should not be reported on your Form 1040. Additionally, if you created a Florida trust as part of your estate plan, the trust may have to file its own Form 1041 if it exceeds the $600 income threshold.

There are other incidental tax issues that your trust or estate may need to deal with depending on the type of assets you held at the time of your death. For instance, if you owned real estate in Florida, your personal representative or trustee will need to make sure any property taxes are paid up. Similarly, if you were self-employed or owned a small business there may be final tax payments due as part of winding up those affairs.

Will Your Heirs Owe Money?

Another question you might have is, “Do the beneficiaries of my trust or estate have to pay taxes on their inheritance?” In general, the answer is no. The IRS does not classify most inherited property as income. However, there are some exceptions, including money inherited from some kinds of retirement accounts and life insurance policies that pay the beneficiaries in installments rather a lump sum.

Of course, if someone inherits property from you and later sells it, he or she would be liable for the taxes on any profit from the sale. Fortunately, the taxable basis for any such sale is the fair-market value of the property at the time of your death, not the date that you originally acquired it. In other words, if you inherited a house that your father originally purchased in 1978 for $100,000, and he passed away in 2018 when the value was now $500,000, the latter would be considered the price you “acquired” the property for when calculating any future profit or loss.

This is just a brief overview of some of the tax issues that may affect the average trust or estate. A qualified Fort Myers estate planning attorney can advise you this and many other subjects. Call the Kuhn Law Firm, P.A., at 239-333-4529 to schedule a consultation with a member of our estate planning team today.