Should Tax on Capital Gains be Paid by the Estate or by the Heirs?
Photo by Michael Discenza on Unsplash
Question:
My father died in 1988. There were unclaimed funds in New York which were in the form of stocks. Of course, over 36 years the stock appreciated a lot so there will be capital gains. The state sold the stock and we received $70,000 to distribute to the siblings. My question is should the estate pay the capital gains or should I distribute the funds and give each sibling a K-1 so they can pay the capital gains personally. Two of the siblings live in states that have no state tax.
Response:
It would be easier and probably result in lower taxes to distribute the funds and have each sibling pay the taxes on their share of the capital gain. As you suggest, some may live in states with no tax on capital gains and some may may have lower income resulting in a lower tax rate. For 2024, the top 20% federal capital gains tax rate for estates and trusts kicks in at just $15,450 of income. For individuals the threshold is $518,900 and for married couples filing jointly $583,750, with those with lower income paying 15% (or nothing if their income is especially low). So paying the taxes at the estate level could end in an extra 5% federal tax on some of the gains as well as the extra state tax.
Related Articles
Don’t know how your trust works?
Whether you’re creating a plan, managing a trust, or are a beneficiary of a trust, this book is your easy-to-read roadmap.
