- The Internal Revenue Service taxes the transfer of property at death. This tax is called the estate tax. As of 2011, an estate may distribute $5 million worth of assets tax-free. Any assets over this limit are taxed at the rate of 35 percent. If an estate is worth over $5 million, the executor of the estate must file an estate tax return to the IRS. Any owed estate taxes must be paid before the estate can be liquidated and distributed to the heirs.
- Another duty of the estate executor is to file the final income tax return of the decedent. The executor must prepare a regular tax return for any income earned by the decedent in his year of death. The executor should add the word "deceased" after the decedent's name on the tax return to let the IRS know the person has died. If income tax is due on the final return, the taxes must be paid out of the estate before it can be liquidated.
- When the heirs on an estate inherit property, they may owe capital gains taxes when they sell the property. When a property appreciates in value, capital gains taxes are charged on the appreciation over the asset's basis (original price). When a person dies, the basis of his assets is increased to their fair market value on the date of death. If these assets increase in value during the estate liquidation period, the heirs will owe capital gains taxes on the appreciation.
- All death benefits from life insurance on the decedent's life will be paid to the insurance beneficiaries immediately after her death. The heirs will receive these proceeds tax-free. The life insurance proceeds could be charged estate taxes, however. The death-benefit value of life insurance owned by the decedent will be added to the value of her estate. Any value that exceeds the $5 million threshold will be charged estate taxes.
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