This is one of my all-time favorite movies. You may remember the scene when the inmates were on the roof and the evil guard was bemoaning an inheritance because the taxes would just take it all away. Then Andy Dufresne asked him if he trusted his wife. That question almost cost Andy his life until Andy went on to explain how a one-time gift to his spouse could help the guard avoid the tax.
Actually, there is no Federal Inheritance Tax.
When someone dies, all of the asset values are computed. If the assets are very high (in 2015 it is above $5.25 million), there is a Federal Estate Tax. Assuming in this example, there is a taxable estate, the tax would be paid out of the estate assets prior to the distribution of these assets by the executor.
With the exception of possible income taxes due from inherited retirement accounts and annuities, the inheritor does not owe any inheritance tax. Any estate tax owed should be paid out of the estate, and the inheritance is out of the net after-tax assets.
In addition, refer to the chapter titled “Step On Up” and you may not even owe income tax when you sell appreciated property. To be perfectly honest, dying is one of the most effective tax planning strategies, but still, I highly advise against it!
I am glad Andy Dufresne didn’t tell the guard about the inheritance tax rules. The movie would never have turned out so interesting without this critical scene!
