When someone dies, the assets are collected into an estate. The gross estate is all the assets the deceased owned on the date of death. The personal representative is responsible for preparing an inventory of the assets for the probate court. The way any stocks are held and whether a beneficiary is named in the will determine who ends up paying the taxes. Stocks held as transfer-on-death immediately pass to the person named on the stock certificate. The Internal Revenue Service taxes stocks that are willed to a specific beneficiary differently than those owned by the estate.
Stocks Owned by the Estate
Decedents often own stocks that are titled solely in their name. Stocks that are not bequeathed to a specific beneficiary remain an estate asset. The personal representative, also known as an executor, is responsible for selling the stocks and placing the funds into the estate bank account. If the estate is large enough to meet the Internal Revenue Service taxation threshold, the estate is taxed on the stock sale proceeds. As of July 2013, the threshold amount is $5.25 million. An estate that is worth less than $5.25 million is not taxed.
Taxes Paid on Probated Stock Sold
If the taxable estate is worth $5.25 million or more after all credits and deductions are taken, the estate is responsible for paying the taxes on the stock sold through probate. If the stock sale results in a capital gain, the proceeds and the remaining estate are taxed at a flat 35 percent rate. For example, assume the decedent’s taxable estate is worth $6 million. Calculate the tax by multiplying $6 million by 35 percent to get the estate tax amount owed of $2.1 million.
Stocks Willed to a Beneficiary
Stocks that are willed to named beneficiaries are deducted from the gross estate. This reduces the value of the estate and may help keep it below the taxable threshold. The beneficiary’s basis is the stock’s market value on the date ownership transferred from the estate to the beneficiary. The beneficiary will not have a taxable event until the stock is sold. A capital gain or loss is reported on the beneficiary’s personal income tax return.
Leaving a Tax-Free Estate
You can use IRS regulations to keep your estate under the taxable threshold. At the time of publication, the IRS lets you make a $14,000 tax-free gift per year to as many individuals as you want. If you’re married, the tax-free amount doubles to $28,000. You can provide for your children’s or grandchildren’s education by funding a 529 college plan. This college education plan lets you give five $14,000 tax-free gifts, or $70,000, in the first year. Married couples can give double that amount, or $140,000. An estate planning professional can devise a plan to make sure your estate avoids taxation.
Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.