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Father trying to help children cope with financial stress of managing estate

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Q: My wife’s father is close to death, and he has moved all of his investments into his bank in the form of cash. He said that was done to help my wife and her brother avoid probate on those instruments. It’s not a lot of money (approximately $250,000), but since I will be doing his taxes for 2022 I’m wondering whether I will have to pay taxes on that cash. Also, will my wife and brother-in-law owe a federal gift tax on amounts over $14,000?

A: It’s difficult to lose a loved one. It’s always too soon, and there’s never enough time. And having to concentrate on money when you’re grieving is even tougher.

In this case, however, it seems as though your father-in-law is trying his best to help his children cope with the financial stress of managing his estate after he’s gone. He has consolidated all of his investment accounts into a single account and sold assets that might have caused some problems if they went through probate.

Let’s deal with the cash situation first. Now that he’s sold his investments, there may be tax to pay on any profits he made from the sales. If he sold an asset like stock or a security that he held for less than one year, he might owe ordinary income tax. Or, if he held the assets for more than one year, he might owe capital gains tax.

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If the $250,000 in cash came from the sale of your father-in-law’s house, it’s possible that there are no taxes to pay. Current law allows homeowners to keep up to $250,000 in profits (up to $500,000 if you’re married) tax free from the sale of their primary residence. The homeowner must have lived in the home as their primary residence for two out of the past five years.

If you’re helping your father-in-law with his income taxes and all of the stock, house and investment sales were in 2021, any taxes he might owe would be due in April 2022 (unless you applied for an extension). You haven’t given us enough information to know what he might owe, so we won’t speculate how those sales would impact his bottom-line payment to Uncle Sam this year.

On the other hand, while $250,000 is a substantial amount of money, it is far less than the estate tax exemption of $12.06 million he is permitted to pass down to his heirs tax-free under federal tax law. In other words, if the total value of his estate totals less than $12.06 million, no federal income or estate taxes will be due. In addition, your wife and brother-in-law would receive his assets without paying any federal income taxes as well.

Finally, the $14,000 limit you mentioned was the gift tax limit a couple of years back. Today anybody can give a gift of up to $16,000 per year without triggering a federal gift tax filing. When the gift is more than $16,000 (in 2022) the person giving the gift must file a gift tax form with the IRS. However, if someone gifts an amount that is above the annual gift tax exclusion, they will use a portion of their lifetime gift tax exemption (which is $12.06 million in 2022). In short, your father-in-law can give your wife and her brother the entire $250,000 federal-tax free.

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The important thing to note is that neither the gift giver nor the recipient of the gift will pay the federal government any taxes on that gift. Rather, the donor files the form and the amount in excess of the annual allowable amount ($16,000 in 2022) counts toward the donor’s lifetime gifts and toward the $12.06 million lifetime exemption (which is scheduled to be reduced starting in 2026), according to IRS.gov. Few people have to worry about paying federal estate taxes on what they leave behind when they die.

We can’t speak to state income and estate taxes, as some states tax estate transfers at very different rates than the federal government. For that information, you’d either have to do some research online or talk to a tax specialist in your state.

Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (Fourth Edition). She is also the chief executive of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact them through the website, BestMoneyMoves.com.

©2022 Ilyce R. Glink and Samuel J. Tamkin. Distributed by Tribune Content Agency, LLC.

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