Help with estate and inheritance tax!?

Question

My grandparents passed away about 7 years ago, my father passed last year. Only after my father passed with their house probated and my father received a 1/3 interest. I am his personal representative and I need to split his portion between my brother and myself (about 15,000 each) Do we need to pay any taxes on this in the state of Minnesota?

Answer 1

You might. It's more of a federal estate tax issue, though Minnesota may have a say. This question calls for qualified professional help.

Ordinarily, what you receive in inheritance is not taxed as long as its value is below the estate tax exclusion limit, which is, I believe, 2 million. However, from what you say, your father didn't receive a 1/3 interest in your grandparents property, his estate received it. Why the house wasn't included in the probate of your grandparents' estate I can't even begin to guess at, but it should have been. The cost basis of your father's share would be what that share was worth at the time he inherited, not what was paid for the house when your grandparents bought it, which was probably a lot less. The same rule would apply when you inherit. Your cost basis (and your brother's) would each be 1/6 of what the house was worth at your father's death. However, since his estate received the share some seven years later, it can be argued that the value of the property at the time the estate received it was substantially more (after seven years of rising values) than it was when your father should have received it, therefore, the estate has received income, which IS taxable, to the estate. Your father's estate would be responsible for paying estate tax on any income produced by the estate, not you.

It's complicated, which is why you need help sorting it out. If your grandparents' estate had been probated promptly, you wouldn't have a problem.

Answer 2

1. Any thing (money and property) you receive as inheritance, you (the receiver) don't pay any federal tax.

2. For any State tax liability check at your State's web site. For most of the States there is no tax.

3. If you inherit a property, your cost basis is the valuation (Fair Market Value) of the property at the date of the decedent's death or the FMV (Fair Market Value) on the alternate valuation date if the personal representative for the estate elects to use alternate valuation.

4. If you sell the inherited property at a price up to your cost basis you don't have any taxes due. However, if you sell the property at price more than the cost basis to you, then you pay the taxes on the profit (sale price minus your cost basis).