Can you inherit debt? (U.S. inheritance tax law)

[masonite]

I'm pretty sure you can't inherit debt directly - the debts are deducted from the assets, right?. But I have a hypothetical.

Suppose I have $100,000 in assets (house, car, etc.) when I die. But I also have $200,000 in credit card debt. I have negative net worth. In my will I name my daughter as sole inheritor.

I die; the creditors seize and sell my assets and are satisfied with a loss, I think, and the estate is bankrupt. But does my daughter then still have to pay any inheritance tax?

I have heard inheritance tax is based on assets prior to deduction of debt. Thus my daughter would owe taxes on the original $100K in assets, which would have been sold to pay the creditors. She's in the hole to whatever nightmarish percentage.

Please debunk this.

[Nametag]

There is no US inheritance tax; the federal estate tax is levied on estates exceeding $3.5 million; your state (your profile says you live in Seattle) also has an estate tax, that cuts in at $2 million:

Washington replaced the inheritance tax in 1982 with an estate tax. Effective January 1, 2009 the Washington State filing threshold is different from the federal filing threshold for completing the estate tax return. If the decedent has a gross estate or a taxable estate plus taxable gifts of $2,000,000 or more, the estate is required to file a Washington State estate tax return. If the decedent has a gross estate or taxable estate plus taxable gifts of $3,500,000 or more, the estate is required to file a Washington State estate tax return, and include a copy of the filed federal estate tax return.

http://dor.wa.gov/content/FindTaxesA...ax_estate.aspx

[Nava]

Also, I understand that it is possible to reject (I don't remember the exact legal term, but that wasn't it) an inheritance. If accepting it meant a loss, or if it simply was the kind of thing that leaves you saying "wth?" (imagine if TokyoPlayer inherited a cabin in the Smoky Mountains... what the heck is he supposed to do with it?), you can refuse it. I imagine that in that case, the non-inheritor wouldn't pay taxes.

[FasterThanMeerkats]

Originally Posted by Nava

Also, I understand that it is possible to reject (I don't remember the exact legal term, but that wasn't it) an inheritance. If accepting it meant a loss, or if it simply was the kind of thing that leaves you saying "wth?" (imagine if TokyoPlayer inherited a cabin in the Smoky Mountains... what the heck is he supposed to do with it?), you can refuse it. I imagine that in that case, the non-inheritor wouldn't pay taxes.

I don't believe you can inherit a loss. The estate is valued, taxes paid, and then it is disbursed. Cashflow-wise, I believe it is the executor's duty to see that the tax is paid, not the inheritors. I would guess that in the case of only real property being available, the property would be liquidated and then dispersed. (e.g. cabin converted to cash)

As to whether you can outright refuse an inheritance, I don't know.

However, you would probably prefer to receive it and then either liquidate it for cash or donate it to receive some kind of tax write-off. It's been a few years since I took personal income tax, but I was taught assets in the U.S. are written up to fair value and deemed "long term" at the time of death (because records of acquisition price are often unavailable) so there wouldn't be any capital gains to the inheritors if they liquidated them.

Disclaimer, I don't have a CPA.

[Polycarp]

In precise usage, one cannot inherit a loss, since an estate with debts equaling or exceeding assets is bankrupt; the executor or administer disposes of the assets to pay the debts to the extent possible (I believe the general practice is to distribute an accounting with a proposed schedule of pay-outs to all debtors, who would then sign off on getting their fair share of the assets' value) and the putative heirs get nothing, unless they buy items of sentimental/keepsake value from the estate. ("I want great-grandma's hope chest; don't sell it to an antique dealer, because I'll pay more to keep it in the family.")

The seeming exception might be that, with the consent of a creditor, a given bequest may be detached from the estate. E.g., Smith contracts to buy Blackacre from Jones for $300,000, with $100,000 down and Jones holding a multi-year mortgage for the remaining $200,000, plus interest. Since it's a private transaction, neither party thinks to have mortgage life insurance put on the property. Some years later Smith takes sick and dies after an extended hospital stay, with normal and last-illness debts slightly exceeding estate assets. By the time of his death Smith has reduced the debt on Blackacre to $50,000, and indicated it was to pass to his widow. If Jones (and I believe the other creditors) accept(s), the widow Smith can elect to retain title to Blackacre and assume the mortgage, which she is able to pay out of her pension and personal assets. So one can "inherit" a debt by taking a bequest subject to specific debt and agreeing to pay off that debt -- provided the laws of the relevant jurisdiction (state, province, nation) allow this. It's not really inheritance of a debt, but rather tbe inheritance of an asset contingent on assuming the attached debt connected to it, but in people's shorthand it could easily be seen as one. In general, all parties are happy for this to happen, as it removes Jones from what he might collect from the estate, leaving more for the other creditors, gives Jones the prospect of collecting the full mortgage value instead of only a part, and allows the widow Smith to keep her house.

On another relevant matter, WARNING: Debt collection agencies are not obliged to make sure you know you are not liable for a deceased relative's debts, and the more unscrupulous of them will depend on confusion about this point on the part of the bereaved family to persuade them to assume the debt and pay it off, rather than settling for what they might get out of the estate. In view of the general ignorance of this practice, I think it's important to make this point clear.

[bizerta]

Originally Posted by FasterThanMeerkats

I don't believe you can inherit a loss. The estate is valued, taxes paid, and then it is disbursed. Cashflow-wise, I believe it is the executor's duty to see that the tax is paid, not the inheritors. I would guess that in the case of only real property being available, the property would be liquidated and then dispersed. (e.g. cabin converted to cash)

As to whether you can outright refuse an inheritance, I don't know. ...

If the assets exceed liabilities, then the estate has zero (or less) value, therefore, there would be no estate tax (even if the tax started at zero, which it does not)

As for refusing inheritance: Yes, it can, and is done. Case in point: Three siblings, call them A, B, and C. Only C has children (D, and E). C dies and leaves all her money to D and E. Some time later, B becomes disabled and goes into a nursing home. After two years, B has consumed all her savings and is now a ward of the state. Now A dies, leaving half to B and half to C (by C's will, D and E each inherit 25%). The only problem is, B's inheritance will be consumed by the state and B would prefer the money go to B's nieces, D&E. B refuses the inheritance from A and the state does not get the $.

The beauty of this is that ... If A's estate is large enough, B escapes paying any gift tax to D&E. Keep in mind that B has no control over who gets the money. A's estate is distributed as if B had pre-deceased A. (In this case, B's only relatives were D & E)

[jayjay]

Originally Posted by Polycarp

On another relevant matter, WARNING: Debt collection agencies are not obliged to make sure you know you are not liable for a deceased relative's debts, and the more unscrupulous of them will depend on confusion about this point on the part of the bereaved family to persuade them to assume the debt and pay it off, rather than settling for what they might get out of the estate. In view of the general ignorance of this practice, I think it's important to make this point clear.

Yes, I had a collection agency try to snow me on this just a couple of weeks ago. One of my late mother's credit cards put her balance into collection as soon as they were informed of her death. I got a call (I'm her executor) from the collection agency trying to convince me to settle. Now, I'm no genius, but I know enough to know the precedent I would be setting by personally assuming her debt that way. I told the guy that he'd have to have patience and wait for probate to clear like everyone else.

[Tom Tildrum]

Originally Posted by Nametag

...the federal estate tax is levied on estates exceeding $3.5 million

This is no longer true. For deaths occuring in 2010, there is no estate tax. For deaths after 2010, the estate tax is currently set to be levied on the portion of any estates exceeding $1 million (with tax rates between 45-55%, IIRC).

There have been attempts at legislation to raise the exemption amount for 2011, but nothing thus far has been passed.