What Is an Inheritance?
Inheritance refers to the assets that an individual bequeaths to their loved ones after they pass away. An inheritance may contain cash, investments such as stocks or bonds, and other assets like jewelry, automobiles, art, antiques, and real estate.
A person can designate beneficiaries in their will to receive an inheritance. In other cases, assets will automatically pass to a spouse or children as heirs.
Key Points to Remember
- An inheritance involves passing down assets after a person’s death.
- Common inheritance items include cash, stocks, bonds, cars, jewelry, art, real estate, and other tangible assets.
- Beneficiaries may face inheritance taxes, with higher rates applied to more distantly related beneficiaries.
- In the U.S., six states impose inheritance taxes: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
- The division of a decedent’s assets according to their will occurs through probate. Absent a will, state laws guide asset distribution.
Understanding How Inheritance Works
The value of an inheritance can range dramatically. In many countries, inheritance assets may come with tax liabilities that depend on various factors, such as the beneficiary’s relationship to the decedent.
Currently, the six U.S. states that impose inheritance taxes are Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Typically, assets bequeathed to a spouse are exempt from these taxes, and children might also enjoy exemptions or lower tax rates.
Inheritance tax differs from estate tax, which is a levy on the transfer of a deceased person’s estate. An estate tax generally does not apply to assets left to a spouse or federally recognized charities.
Unrelated beneficiaries are usually subject to higher inheritance taxes. For example, in Nebraska, 2018 figures showed lineal descendants like children paid lower percentages, whereas distant relatives and non-relatives faced higher rates on smaller amounts.
Life insurance is a tax-free method of inheritance. Policy payouts to named beneficiaries typically avoid inheritance taxes.
Navigating the Probate Process
Probate is the legal procedure where a decedent’s assets are distributed according to their will and state laws. If a valid will exists, a court appoints an executor to manage asset division. Without a will, an administrator is appointed to distribute assets per state laws.
Distinguishing Beneficiaries from Heirs
Beneficiaries are individuals named in a will, while heirs, often children or a surviving spouse, inherit by law if no will exists, or the will is invalid.
Strategies to Minimize Inheritance Taxes
An inheritance tax is levied by some states. Beneficiaries can reduce their tax burden by placing assets in a trust, gifting assets while alive, or taking out a life insurance policy naming heirs as beneficiaries.
Ways to Minimize Taxes on a 401(k) Inheritance
Inheriting a 401(k) from a spouse can be straightforward by rolling it over into an IRA to defer taxes. With a parent’s 401(k), consult plan documents to explore options and consider spreading distributions to mitigate tax burdens.
Protecting an Inheritance in Bankruptcy
Inheriting within 180 days of filing for Chapter 13 bankruptcy generally adds to your payment plan obligations. If you inherit after 180 days, recent rulings are mixed on whether inheritances remain accessible to creditors.
Finding Unclaimed Inheritances
Start with your state’s unclaimed money office to locate potential unclaimed inheritance assets like unpaid wages or bank accounts.
What Is Probate?
Probate is the legal process that verifies and administers a deceased person’s will or estate. A court-appointed executor or administrator manages assets and settles liabilities before distributing to beneficiaries.
Final Thoughts
While planning for inheritance isn’t often an enjoyable task, it’s essential for reducing future burdens on loved ones. Structured planning can significantly reduce legal complications and taxes, maximizing the benefit to beneficiaries.
Related Terms: estate planning, inheritance tax, probate, executor, beneficiary.
References
- Tax Policy Center. “How Do State Estate and Inheritance Taxes Work?”
