Heir considers inheritance tax implications if separated from sibling

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Q: My mother recently passed away. She was 91 years old. We sold her apartment this year while she was still alive. We placed the proceeds of the sale in an account, which I held jointly with her, with right of survivorship. I’ve had this arrangement with her for about twenty years. The account was exclusively for his benefit. All of his known bills are paid. I held power of attorney for financial matters for her while she was alive.

The sale of the condo was for $150,000. She qualified for the personal residence exclusion. I assume the title company will report the sale to the IRS. Are there any tax implications on the money I received from the joint account? I plan to share what’s left in the account with my brother, and we’re good and totally transparent with each other.

A: Our condolences on the recent passing of your Mom. But it looks like you and she have sorted things out, and your good relationship with your brother will no doubt come in handy as you heal from this loss.

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You mentioned that your mother sold her house before her death and that she qualified for the home sale exclusion. We’re assuming you’re referring to the IRS code provision that allows homeowners to sell their home and not pay taxes on up to $250,000 in profits. If you are married, you can exclude $500,000 of profits from tax with the IRS.

As you may know, the rule requires the owner to have lived in the house as their primary residence for two out of the last five years. There are other rules, but these are the most important. You can get the full summary of requirements from IRS Publication 523, “Selling Your Home.”

Since your mother probably lived in the house for many, many years and it was her primary residence, selling her house would not trigger an IRS taxable event. You should be good there. That said, make sure the title company reported the entire sale on your mother’s social security number. Unless something else happened that you didn’t share, there would be nothing owed to the IRS.

Now let’s move on to bank funds. After the transaction was completed, the settlement agent or title company sent the proceeds of the sale to your mother’s bank account. You and your mom were both on that account. From the information you provided, it appears that the total value of your mother’s estate was low. In any event, it is likely to be well below the number that would trigger federal property taxes. This way, your mother’s estate would not have to pay any federal estate tax.

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Finally, you inherited the money from his account when he died and you don’t have to pay tax on that inherited money. With respect to estate tax, the donor may have to pay taxes, but as mentioned, your mother did not have federal estate tax to pay. For 2022, the estate tax threshold is $12.06 million. This means that if you die and your estate is valued at less than the $12.06 million limit, you owe no federal estate tax.

At the state level, you may have taxes to pay, but you will need to check with an estate attorney or tax professional who is familiar with the estate laws of the state in which your mother lived.

When it comes to splitting the money between you and your brother, the tax consequences should be the same for both of you. There is a question that interests us. Since you inherited all the money from your mother’s account when she died, you may want to consult a tax professional about the tax implications of splitting the money with your brother.

If the IRS considers all the money to be yours, you can give your brother $16,000 a year without any federal tax consequences. But if you give her more than $16,000 a year, you may need to file a gift tax form with the IRS. You can still split the money, but in this situation the money you give to him would count against your $12.06 million estate limit (which is expected to be significantly reduced in 2025, although we’re not sure it will happen one day).

If you end up talking to your tax preparer or an estate attorney about whether your mother owes estate taxes, you might want to ask about the best way to handle the transfer of funds to your brother. You are looking for a win-win solution: you want to manage the funds properly, but make sure you do not end up with unforeseen negative consequences for you.

Ilyce Glink is the author of “100 questions every first-time home buyer should ask(Fourth Edition). She is also the Managing Director of Best Money Moves, an app employers provide to employees to measure and reduce financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact them via the website, BestMoneyMoves.com.

©2022 Ilyce R. Glink and Samuel J. Tamkin. Distributed by content agency Tribune.

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