Taxes from estate

My father passed away this year leaving a few things to me and 3 siblings.

The house was in Minnesota was Life of Deed with all siblings listed as owners. I live in Ca.

A CD that has us as beneficary. Bank held Fed.
An inunity with us listed as beneficary. (took 10% for Fed)

We sold the house.

What am I going to owe in taxes for these?

Thanks for your help.

Unless the estate meets the Federal threshold of (I think, don't quote me) $1 million, there should not be any estate taxes owed.

State estate taxes may be another matter.

Who is the lawyer who handled the probate? They can advise you on this.

I am going to assume that the net estate (ALL assets - ALL liabilities + any gifts made within the previous 5 years) was worth less than than the exclusion of $2,000,000. This would wipe out any actual estate taxes. Anything over this amount would be subject to very high tax between ~30-55%.

The net estate may or may not include the life estate. If the trust was made less than 5 years ago, it will be factored back into the gross estate. In this case, it would add to the estate tax mentioned above. If it was in the trust for less than 5 years and there was no estate tax, then the property will be passed to the heirs at market value and no capital gains will be due.

If the trust has existed for over 5 years, the property is removed from the estate for determining the size of the estate. However, there will be no step-up in value to the heirs from the market value on the day that the home was put into the trust. In other words, you will owe Long Term capital gains (15% tax rate) on any appreciation on the property since the day your father put it into the trust.

The CD will taxed to the heirs only to the extent that there is current income earned. For example, a $100,000 CD that earns 4% would be at about $2000 of interest for the year. This $2000 is the portion that is currently taxable. In previous years, your father would have been paying the taxes due on the interest earned. Yet, if the CD is in an IRA, then the entire amount is taxable as income to the heirs.

The annuity will be taxed the same as the CD, except all of the growth has been deferred (faher not paying annual taxes previously) and may be much, much higher than a CD that taxes have been kept current on. For example, a $100,000 annuity that has appreciated to $200,000 will have the first $100,000 (growth) taxed at regular income rates to the heir, while the original $100,000 used to purchase the annuity will be returned tax free to the heirs. You have 5 years to distribute the entire annuity and can be done gradually over the course of this period. Again, if the annuity was an IRA, then the entire amount is taxable as normal income to the beneficary, but this payout can be taken as a lump sum, over 5 years or less, or stretched based on the heir's life expectancy.

Each heir is responsible for their proportion of inheritance and the taxes that go with it.

As Puck mentioned above, State levied inheritance taxes may be lower than the Federal threshold. For example, they may tax an estate that nets at $1,000,000 instead of $2,000,000. The primary state of concern would be the one where your father resided, not where the heirs live. It doesn't sound like this pertains to you, but other states may be involved if there were real property holdings located elsewhere (real estate is usually taxed in the state that is physically located).

If your father's spouse was still living and received a portion of the estate, there will be no taxes due upon her inheritance of any proceeds. The estate taxes will be deferred until her death and may result in an even larger estate and tax bill down the road.

You will have excuse a total dummy when it comes to this stuff. The LIfe of Deed was less than five years. Does this mean that I don't owe taxes on anything?

That is correct...in general.

I'm not sure if you are clear on whether it is a simple life-deed or a life esate trust.

My confusion lies in the fact that you say the life-deed named the siblings as owners, not beneficiaries. This indicates a gift or trust that actually transferred ownership from your father to you and your siblings while he was alive. If you are named as owners, then it is a life estate trust (he gifted you the house while alive, but retained his right to live in it until death) and you will owe capital gains because the cost basis is the same as your father's would have been if he had simply sold the house the same day that he gave the property to the trust. In short, your new basis is his original adjusted basis on that day (original cost + improvements).

IF your father used a life-deed (life estate deed) instead of a trust, the property was never really transferred out of the estate (disposed of) and would have been included in the gross estate. The 5 year rule applies to trusts and gifts only, not deeds.

A life-deed is used merely to avoid probate and ensure exactly who your beneficiaries will be while maintainging full ownership of your home. A life estate trust is used to transfer assets out of an esate to protect them (ie. Medicaid planning, estate tax planning, etc.).

The IRS states that if a property is to be include in the gross estate, then it would be treated as if it was never passed by the opriginal owner until death, thus qualifying you for the Fair Market Value step-up in basis. In short, you should have little/no capital gains to report.

From the IRS:

Section 1014(a)(1) provides that the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent generally is the fair market value of the property at the date of the decedent’s death. This rule does not apply if the property is sold, exchanged, or otherwise disposed of before the decedent’s death by the person.

Section 1014(b)(9) provides that, for purposes of § 1014(a), property acquired from the decedent by reason of death, form of ownership, or other conditions if by reason thereof the property is required to be included in determining the value of the decedent’s gross estate for estate tax purposes, is considered to have been acquired from, or to have passed from, the decedent.

You should owe ZERO capital gains tax on the house.

OK, now the simple version:

If you had ownership of the house prior to your father's death, you will owe capital gains. The a cost basis TO YOU is your father's ORIGINAL cost to buy the home + improvements on the date that he gifted it to you. For example, if he paid $50,000 for the house, then added a room for $20,000 his adjusted basis would be $70,000. Anything above this amount would taxable as long term capital gains to the heirs (when they sell).

If you DID NOT own the house in any way shape or form prior to your father's death. The cost basis for the house TO YOU is the Fair Market Value (FMV) on the day he died. Little or no capital gains will be owed.

The LIfe of Deed was less than five years. Does this mean that I don't owe taxes on anything?The life-deed applies only to the house. The rest of the stuff is still very much taxable indeed.

Puck is 100% correct about seeking a professional to handle your SPECIFIC case. Paying for professional CFP, ChFC or CPA may be your best bet. A probate laywer has no incentive to pass an estate efficiently as possible, nor do they have anything to do with your taxation and beneficary designations.

thank you very much for your help. I will be seeing a tax accountant for guidance.

The paperwork I signed for the sale of the house was a 1099-S I don't know if that helps or not. My brother is sending me a copy of the Life of Deed contract so maybe I will get more from that.