J. Kelly Kennedy, Attorney/CPA, PLLC

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Attorney and CPA

Inheritance tax troubles aren't just for the super-rich

Those who are planning their estates or who stand to inherit wealth may think taxes won't pose a problem when it comes time to transfer assets from the estate to the heirs. After all, Florida has no estate tax and the federal estate tax currently kicks in only on transfers over $5,250,000. However, there are many other kinds of tax problems that can come up when people inherit wealth through a will.

Sometimes these problems only come to light after a person passes away. For example, a mother may pass away after a long illness, and her children don't learn until after her passing that she had failed to pay taxes for several years. The unpaid taxes can take a bite out of the assets in her estate, and that can limit their inheritance.

State tax issues also come up quite frequently. These can be especially tricky for estates that include assets in multiple states. For example, when someone had a home in Wisconsin and a winter home in Florida, the heirs may be stuck trying to prove to either state which one should be considered the deceased's primary residence for tax purposes.

Some common tax problems come from an estate plan that neglected to plan for taxes. For example, a mother plans to provide equally for her two children. She names her daughter the beneficiary of her $100,000 life estate policy and leaves a $100,000 investment account to her son. However, the life insurance proceeds generally will not be taxed, while investment accounts do get taxed. The result is that the son's inheritance will be significantly less than the daughter's.

With careful estate planning, many of these problems can be avoided. Florida residents who are writing wills want to make sure they leave a legacy to their loved ones. They don't want to leave a mess with the IRS.

Source: Reuters, "What to do when you inherit a tax mess," Amy Feldman, July 11, 2013