[ME] Would transferring real estate upon death create any inheritance or capital gains liability for grantees?
Should the real estate be transferred upon death of the current owners, would there be any tax liability to the Grantees for inheritance tax or capital gains taxes for example?
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I will try to give some thoughts...
In Maine, as well as under federal law, real estate transferred upon death through a will or by a Transfer on Death (TOD) designation is generally not subject to inheritance tax because Maine does not currently impose a state-level inheritance tax. However, Maine does have an estate tax that applies to estates exceeding a certain threshold, which as of recent years is approximately $6.8 million (though this figure can adjust annually). At the federal level, the Internal Revenue Code (IRC) imposes an estate tax on estates exceeding the federal exemption amount, which is approximately $13.61 million per individual for 2024. If the total value of the decedent's estate, including the real property, remains under these thresholds, there would be no federal or Maine estate tax due. Importantly, the estate itself, not the heirs or grantees, is responsible for paying any applicable estate tax before the property is distributed. The TOD designation effectively allows the property to bypass probate, but it does not change the potential exposure of the estate to taxation if the total estate value is above these limits.
Regarding capital gains tax, the key legal concept involved is the step-up in basis provided under federal tax law (IRC § 1014). When real property is inherited—whether through a will, TOD deed, or intestate succession—the tax basis of the property is generally "stepped up" to its fair market value as of the date of the decedent’s death. This means that if the heirs later sell the property, capital gains would typically be calculated based on the difference between the sale price and the market value at the time of inheritance, rather than the original purchase price paid by the deceased owner. This stepped-up basis significantly reduces or eliminates capital gains liability for heirs unless the property appreciates further after the date of death. The only situation where this could be disrupted is if the property is transferred during the owner’s lifetime instead of upon death, which would result in the recipients inheriting the original lower basis. Thus, proper estate planning using TOD designations generally preserves the benefit of the step-up in basis, mitigating capital gains exposure for the children as grantees.
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I understand your concern about potential tax liabilities. Are you inquiring about real estate laws in a specific state?
Yes, Maine as well as Federal.
Have the current owners made any provisions in their will or estate plan regarding the transfer of the real estate upon their death?
Yes.
Is there anything else the Lawyer should know before I connect you? Rest assured they’ll be able to help with inheritance tax.
The TOD would be to the owners' three children per the owner’s will.
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I will try to give some thoughts...
In Maine, as well as under federal law, real estate transferred upon death through a will or by a Transfer on Death (TOD) designation is generally not subject to inheritance tax because Maine does not currently impose a state-level inheritance tax. However, Maine does have an estate tax that applies to estates exceeding a certain threshold, which as of recent years is approximately $6.8 million (though this figure can adjust annually). At the federal level, the Internal Revenue Code (IRC) imposes an estate tax on estates exceeding the federal exemption amount, which is approximately $13.61 million per individual for 2024. If the total value of the decedent's estate, including the real property, remains under these thresholds, there would be no federal or Maine estate tax due. Importantly, the estate itself, not the heirs or grantees, is responsible for paying any applicable estate tax before the property is distributed. The TOD designation effectively allows the property to bypass probate, but it does not change the potential exposure of the estate to taxation if the total estate value is above these limits.
Regarding capital gains tax, the key legal concept involved is the step-up in basis provided under federal tax law (IRC § 1014). When real property is inherited—whether through a will, TOD deed, or intestate succession—the tax basis of the property is generally "stepped up" to its fair market value as of the date of the decedent’s death. This means that if the heirs later sell the property, capital gains would typically be calculated based on the difference between the sale price and the market value at the time of inheritance, rather than the original purchase price paid by the deceased owner. This stepped-up basis significantly reduces or eliminates capital gains liability for heirs unless the property appreciates further after the date of death. The only situation where this could be disrupted is if the property is transferred during the owner’s lifetime instead of upon death, which would result in the recipients inheriting the original lower basis. Thus, proper estate planning using TOD designations generally preserves the benefit of the step-up in basis, mitigating capital gains exposure for the children as grantees.
Does that make sense?
Yes, thank you very much.
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