I recently recieved a substantial POD cd from a deceased relative. I also recieved a trust that is in currently in probabte in the state of Florida and I am staying in California. How is the POD money going to be taxed? This death brought me back to the US from living abroad so I don't necessarily have residency in any state yet and I will be returning overseas in the next few months. Would it be better to file taxes in Florida or Ca regarding these issues?
If the relative died in 2010 there is no estate tax. If they died in 2009 they have a $3.5 Million exclusion to work with before the estate is taxable. In any regard, the executor is responsible to pay any associated estate taxes on the transfer. However, you need to inquire of the the executor whether the estate taxes have been paid, because if there is a deficiency assessed on the estate it is possible for the IRS to go after the transferee to pay the tax (in this case that is you).
Any individual seeking legal advice for their own situation should retain their own legal counsel as this response provides information that is general in nature and not specific to any person's unique situation. Circular 230 Disclaimer - Advice given in this response cannot be used to eliminate penalties with the IRS or any other governmental agency.
Ben Franklin is credited with saying "There are two things in life which are certain; death and taxes." Your questions bring Ben's words to my mind.
Your first question asks about the taxes from a Payable On Death, Certificate of Deposit. Generally speaking any accrued income from the CD is taxed to the recipient. The bank will send you a 1099 spelling out the amount of income on the CD. If you want to know right now, I would recommend that you call the bank and have them send the information to you a head of time.
Your second question about the tax on trust assets is more complicated. This year is a very interesting year for payment of taxes on death. Last year we had the estate tax. An estate tax is a federal tax based on the fair market value of all of the assets owned by the decedent on the date of death. There was also a $3.5 Million coupon which was used to protect the decedent's estate from the estate tax. This year the coupon is unlimited. There is no estate tax in 2010.
That being said, there are other taxes due upon death. The most important additional tax is income tax. Income tax is still owed, despite the fact that there may be no estate tax. In addition, for this year, the step-up in basis rule is gone. For example, if the decedent (when alive) bought property for $100 (cost) in 2000, and sold it in 2009 for $500 (the sale price), there would be capital gains tax on the appreciation of the property. The appreciation in this example is $400. So there would be capital gains tax due on the $400.
Let's change the facts around a little. What if the decedent didn't get a chance to close on the deal because he died. If he died in 2009 the numbers would change. The sale price would be the same. It would be $500. However the cost would be different. Under the step up in basis rule, the cost gets "stepped up" to the sale price. The cost would be $500 and the sale price would also be $500. The result of this transaction is no income tax upon death.
All right let's move ahead to 2010. What if the decedent passed away in 2010 instead. Well in 2010 there is no estate tax ,but the step-up in basis rule is gone. If the sale of the property took place in 2010, the taxable event is the same for the living and the dead. There would be capital gains tax on the appreciation of $400. While there are coupons to help protect the beneficiaries against this tax, the coupons only work if the beneficiaries receive assets from the decedent directly. The trustee will be filing a Section 6018 Carryover return to determine the amount of income tax liability owed by the trust. The trust is responsible for this tax if the trust has the resources. If the trust doesn't have the resources, the beneficiaries are responsible for the bill.
For your last question, where to file, I would recommend you contact the accountant for the estate and your own tax advisor. The advisors can tell you about the impact of the new income tax rules on California as well as Florida residents and on your specific situation.
This answer does not constitute legal advice and does not and is not intended to create an attorney-client relationship. The law may vary depending on the state in which you reside. It is intended only to give some direction in which to seek assistance.
Circular 230 Disclosure: Pursuant to recently-enacted U.S. Treasury Department Regulations, I am now required to advise you that, unless otherwise expressly indicated, any federal tax advice contained in this communication, including attachments and enclosures, is not intended or written to be used, and may not be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.
The good news is that you will owe no taxes in any event, as Estate and Gift Tax is a payor tax and not a payee or recipient tax. The POD CD is a non-probate asset, but does count against the estate value for estate tax purposes, but again, that is the estate's tax liability issue, not yours. As was said in another response, if the death occurred in 2010, there is no estate tax either, and if it was in 2009, there is a large estate exclusion amount. It does not affect your tax bracket at all, as it is deemed to be an inheritance (for tax purposes, a gift, which is not income).
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