If an adult child co-owns a home with a parent, and adult child is a joint account holder on parent's bank account, will the home and bank account assets be subject to inheritance tax at the time of the passing of parents if the total assets value (home and bank account) are above the inheritance tax assessment threshold on both IRS and State level?
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Inheritance tax question
- Thread Starter Jon1980B
- Start date
Tax Counsel
Well-Known Member
If an adult child co-owns a home with a parent, and adult child is a joint account holder on parent's bank account, will the home and bank account assets be subject to inheritance tax at the time of the passing of parents if the total assets value (home and bank account) are above the inheritance tax assessment threshold on both IRS and State level?
The federal government does not have an inheritance tax. It does have an estate tax. The federal estate tax is levied on the value of the estate (after certain allowable deductions) that exceeds the unified credit that the decedent has available. Assuming that the decedent has not used up any of that unified credit with gifts made during his/her lifetime then if the decedent died in 2018 he or she would have a unified credit of $11.18 million dollars. In short, if the decedent never used up any of his/her unified credit during his/her lifetime and died this year, the estate tax wouldn't apply unless the estate was worth more than $11.18 million. This amount will change each year for inflation, and starting in 2026 it will go back down to something over $5 million because last year's tax cuts will expire at the end of 2025. But in any event, a decedent has to have a lot of assets to be subject to the federal estate tax, and anyone having close to $5 million in assets ought to see an estate planning attorney or tax attorney for advice on how to avoid having to pay more gift and estate tax than necessary.
How much of the bank account and the home that the parent and child co-own would get included in the gross estate of the decedent parent for federal estate tax depends on the details of the account: exactly how the property and account is held (tenants in common or joint tenants with a right of survivorship), who put the money into the bank account and the house, etc. In general if the parent put all the money into those assets and just put the kid's name on them for estate planning purposes all of the value of the account and the home would be included in the gross estate and thus subject to the tax.
Not every state has an inheritance tax or estate tax, so you'd have to mention the states in which the decedent lives and what other states he or she may have property to know if what taxes may apply at death and how these assets would get treated.
Thank you for your reply. I checked my state's estate tax requirement, and it begins at 4 million dollars of estate for 2018, and in 2019, will increase to the same as federal estate tax exemption which leads me to further questions.
1) Is it correct to say that as long as the estate during the year of parent's passing is below the estate tax requirement for both IRS and state, the estate is not subject to estate tax no matter how the estate was co-owned with the child?
2) If the child inherits parent's Traditional IRA, my understanding is inherited Traditional IRA will be subject to income tax, so should the Traditional IRA be excluded in estate tax consideration? It seems to me inherited Traditional IRA cannot be subject to both income tax and estate tax.
3) In case of inherited Roth IRA, will that be excluded from estate tax consideration? Money in Roth IRA has been already taxed so withdrawal is income-tax free for both the principal and earning so is it excluded from estate tax?
1) Is it correct to say that as long as the estate during the year of parent's passing is below the estate tax requirement for both IRS and state, the estate is not subject to estate tax no matter how the estate was co-owned with the child?
2) If the child inherits parent's Traditional IRA, my understanding is inherited Traditional IRA will be subject to income tax, so should the Traditional IRA be excluded in estate tax consideration? It seems to me inherited Traditional IRA cannot be subject to both income tax and estate tax.
3) In case of inherited Roth IRA, will that be excluded from estate tax consideration? Money in Roth IRA has been already taxed so withdrawal is income-tax free for both the principal and earning so is it excluded from estate tax?
Tax Counsel
Well-Known Member
Thank you for your reply. I checked my state's estate tax requirement, and it begins at 4 million dollars of estate for 2018, and in 2019, will increase to the same as federal estate tax exemption which leads me to further questions.
Check to see if your state has an inheritance tax, too. Some states have both.
1) Is it correct to say that as long as the estate during the year of parent's passing is below the estate tax requirement for both IRS and state, the estate is not subject to estate tax no matter how the estate was co-owned with the child?
How the property is owned affects how the gross estate for federal estate tax is computed. But if you looked at the property that the parent has an ownership interest in and treated it like the parent was the only owner (thus including all the value of that asset in the gross estate) and it's still under the unified credit that the parent has at the time of death then it is true that there would be no estate tax for the estate to pay. Just remember that some of the unified credit may be used up before death with gifts made during life that are subject to the federal gift tax.
2) If the child inherits parent's Traditional IRA, my understanding is inherited Traditional IRA will be subject to income tax, so should the Traditional IRA be excluded in estate tax consideration? It seems to me inherited Traditional IRA cannot be subject to both income tax and estate tax.
Your assumption is not correct. The IRA is included in the gross estate for federal estate tax and the beneficiary includes the distributions he or she receives from it in income for federal income tax, too. The traditional IRA is an asset that was never subject to income tax to the decedent so the beneficiary has to pay that. The other assets in the estate the decedent bought with money that was already taxed. So it's not really not as different as it might seem at first glance — the decedent or beneficiary has to pay the income tax on the income somewhere.
3) In case of inherited Roth IRA, will that be excluded from estate tax consideration? Money in Roth IRA has been already taxed so withdrawal is income-tax free for both the principal and earning so is it excluded from estate tax?
No. Again, the Roth is included in the gross estate of the decedent for the estate tax. But since the decedent already paid the tax on the income that went into the Roth the beneficiary does not include the distributions from the Roth in income for income tax.
Pretty much everything that the decedent owned gets included in the gross estate for the estate tax, and in some cases even property that the decedent transferred before death gets added back to the gross estate, too.
