The estate planning equation is a two-way street. There is the person who is leaving inheritances, and then there are the inheritors. Learn more about taxes in Northern California in this presentation.

1. Do I Pay Taxes When Someone Leaves Me Money? www.norcalplanners.com 1
DO I PAY TAXES IN
NORTHERN CALIFORNIA
WHEN SOMEONE
LEAVES ME MONEY?
“The estate planning equation is a two-way street. There is
the person who is leaving inheritances, and then there are
the inheritors.”
TIMOTHY P. MURPHY
NORTHERN CALIFORNIA CENTER FOR ESTATE PLANNING AND ELDER LAW

2. Do I Pay Taxes When Someone Leaves Me Money? www.norcalplanners.com 2
When you are planning your estate, you should certainly consider the tax
implications that the inheritors may face. We will look at some of the facts in this
paper.
FEDERAL ESTATE TAX
The federal estate tax is a death tax that can come into play for high net worth
individuals. The amount of the federal estate tax exclusion or credit in 2015 is
$5.43 million. You can transfer as much as $5.43 million tax-free, but the estate
tax would potentially be applicable on transfers that exceed this amount.

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There is one caveat to the above statement. We have an unlimited marital estate
tax deduction in the United States. You can leave any amount of money and/or
property to your spouse free of the estate tax, as long as your spouse is an
American citizen.
We should point out the fact that the federal estate tax would be applicable on
the entirety of the taxable portion of the estate in question. It would not be
imposed on asset transfers to each individual inheritor.

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INHERITANCE TAX
Some people think that an inheritance tax and an estate tax are the same thing,
but there are differences. As we stated previously, and estate tax is levied on the
entirety of the non-exempt portion of an estate.
An inheritance tax would be levied on transfers to each inheritor who is not
exempt from the tax. It would be possible for an estate tax and an inheritance
tax to be levied.
The good news is that there is no federal inheritance tax. There are some states
in the union that have state-level inheritance taxes. We practice in the state of
California, and there is no inheritance tax in our state.
STATE-LEVEL ESTATE TAX
There are a number of
states that impose state-
level estate taxes. California
is not among them.
However, if you own
valuable property in a state
that does have a state-level
estate tax, you could face
exposure.

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INCOME TAX
It would be logical to assume that you probably have to claim an inheritance that
you receive when you file your annual income tax return. In fact, an inheritance
would not be looked upon as taxable income by the Internal Revenue Service.
CAPITAL GAINS TAX
The capital gains tax is potentially applicable if you are in possession of assets
that have appreciated. You would realize a gain for tax purposes if you liquidate
an appreciated asset and take direct possession of the gain.
If you were to inherit assets that appreciated during the life of the decedent, you
would get a step-up in basis. For capital gains purposes, the value of the assets
would be equal to their value at the time you inherited them. You would not be
required to pay capital gains taxes on the gains that took place during the
decedent's life.
However, you would face capital gains exposure if you were to realize a gain
after you assumed possession of the assets in question.
INSURANCE POLICY PROCEEDS
If you are the beneficiary of a life insurance policy, the company would pay you
directly after the death of the policyholder. You would not be required to report
the receipt of the proceeds as income for income tax purposes.

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SUMMARY
There are a handful of states that impose state-level inheritance taxes, and this
type of death tax can come into play if you live in one of these states.
Inheritances are not subject to income taxes, and this would include life
insurance proceeds.
The federal estate tax can be a factor if the value of the estate exceeds the
amount of the credit or exclusion. This tax would be levied on the entirety of the
taxable portion of the estate.

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In 2015, the exclusion stands at $5.43 million. Since this is a relatively high
exclusion, most people are not going to be exposed to the federal estate tax,
and there is no estate tax on the state level in California.
If you would like to learn more about how taxation can affect asset transfers,
schedule a consultation with a licensed estate planning attorney.
REFERENCES
IRS
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estate-and-
Gift-Taxes
Forbes
http://www.forbes.com/sites/ashleaebeling/2013/01/28/where-not-to-die-in-
2013/

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About the Author
Timothy P. Murphy
Timothy P. Murphy is an estate planning and elder law attorney
whose practice emphasizes helping people to build, preserve
and pass on their wealth. He works with his clients to
accomplish their goals while avoiding unnecessary court
proceedings and minimizing or eliminating exposure to death
taxes. Mr. Murphy also assists families facing the myriad of
problems associated with dealing with a loved one’s declining health and rising
needs for care. He has practiced law in the Sacramento area for over 32 years,
first with a large firm, and then with his own firm since 1987.
Tim has written a regular column on legal issues for Senior Magazine. He also
was a regular featured guest on the Money Experts radio program heard locally
on KFBK (AM 1530). Tim has been featured in the Sacramento Bee, Sacramento
Business Journal, Sacramento Magazine, Comstock’s Magazine and other
publications on estate planning and related topics. He also assisted local Channel
3 (KCRA) in an investigative report on the trust mill problem in the Sacramento
area and was featured on Channel 10 (KXTV) in its series on personal financial
planning.
Northern California Center for Estate Planning and Elder Law
www.norcalplanners.com
SACRAMENTO
2277 Fair Oaks Boulevard
Suite 320
Sacramento, CA 95825-5599 Phone: (916) 437-3500