Estate Vs. Beneficiary Taxes


When an individual dies with a sizable estate, the tax implications for the beneficiaries can be a bit confusing. The estate will handle the taxes in some cases, while the beneficiary may be responsible for some tax burden in others. Understanding the differences between these scenarios can help you avoid a big tax bill.

Estate Taxes

  • When a person dies, his estate will be distributed through a trust or with the help of the probate court. During this time, the creditors of the estate will be paid out of the available assets. Any outstanding taxes, such as income or property taxes, will also be paid. If the value of the estate is above a certain amount, it can be subject to estate taxes. In that case, part of the estate will be liquidated to pay for the taxes incurred.

Beneficiary Taxes

  • If you inherit money or assets from an estate, as a general rule, you should not have to pay any taxes on what you inherit. The taxes should be taken care of by the estate before you receive the assets as a beneficiary. This allows you to receive a relatively large amount of money without having to worry about a large tax bill. You may have to wait until some of the assets are sold to pay estate taxes, but you will not have to come up with the money yourself to pay for these taxes.

Life Insurance Benefits

  • In many cases, individuals have life insurance policies that pay their beneficiaries a lump sum of money when they die. If you are the beneficiary of a life insurance policy and you receive a lump sum, you should not have to pay any taxes on the amount that you get. However, if you get a life insurance payout and you elect to receive regular payments instead of a lump sum, you could have to pay taxes on the interest that you earn on the money.

Inherited Stock

  • Sometimes, the estate will give you a certain amount of stock as part of your inheritance. When this happens, you do not have to pay taxes on the stock immediately. The cost basis of the stock then changes to the date of the death of the previous owner. If you sell the stock immediately, you may not have any capital gains taxes to worry about. If you hold onto the stock and it grows in value before you sell, you would only have to pay capital gains taxes on the difference between the new cost basis and the selling price.

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