The executor of the estate is responsible for making sure these levies are paid. Once the estate has paid all required estate taxes and settled any financial obligations, it can pay out the remaining assets to inheritors — who then become responsible for settling inheritance taxes. Their taxable amount is based on the specific amount distributed to them, rather than the total size of the estate.
Spouses, for example, are always exempt from paying inheritance taxes. Immediate relatives, such as children, are also often exempt or pay some of the lowest inheritance tax rates. Beneficiaries who are nonrelatives end up paying the highest tax rates. Inheritance tax rates differ by the state. As of , the six states that charge an inheritance tax are:.
Children, however, are charged a 1 percent tax rate, while nephews and nieces get taxed at 13 percent. Pennsylvania, meanwhile, is the only other state besides Nebraska that has decided to charge lineal heirs children and grandchildren , with their tax rate being 4. Beneficiaries might not have much they can do to lower their bills, but they can work with their descendants or relatives on finding the best tax-saving strategy for passing on their wealth.
You might choose to relocate to a state that charges neither an inheritance tax nor an estate tax to limit how much of your wealth ends up going to the government after you die. A trust allows a third party, or a trustee, to hold and direct assets in a trust fund on behalf of a beneficiary. It allows someone to place assets in a trust while they are still alive, while control of the trust is transferred after death to a designated beneficiary. There are two types of trusts: revocable and irrevocable.
An expert can help you identify the best course of action for limiting your tax bill to ensure that you maximize the inheritance that you pass on to your beneficiaries.
However, as you'll see below, this isn't the norm across the country. States that levy an inheritance tax include:. And here are the states that have estate taxes, inheritance taxes or both:. In most cases, assets you receive as a gift or inheritance aren't taxable income at the federal level.
However, if the assets you inherit later produce income perhaps they earn interest or dividends, or you collect rent , that income is probably taxable. There are a few ways to minimize the tax bite on handed-down assets. One common element of estate planning is to give assets away before dying.
Learn how the gift tax works. Getting help from a qualified tax expert can be key. However, those leaving the estate can take steps ahead of time to ensure beneficiaries are in the best situation possible. These estate-planning vehicles include living trusts , irrevocable trusts and grantor retained annuity trusts. If assets appreciate after you inherit them, you might need to pay capital gains tax if you sell the assets.
The capital gains tax rate is based on, among other things, the profit you make. Certain types of inheritances might also create taxable income. By Mary Randolph , J. The good news for people who inherit money or other property is that they usually don't have to pay income tax on it. This comes as a happy surprise to many inheritors.
An inheritance can be a windfall in many ways—the inheritor not only gets cash or a piece of property , but doesn't have to pay income tax on it. It doesn't matter how the property passes to the inheritor. Whether the property passes under the terms of a will or trust , or the inheritor was a designated beneficiary for example, a payable-on-death bank account , it's not taxable income. There's always an exception to the rule. In this case, it concerns funds in retirement accounts, which may be taxed when they're withdrawn by inheritors.
Whether an inherited account is taxable depends on the kind of account. The money contributed to traditional IRAs and k plans is generally not taxed before it is put in. Either contributions are made with pre-tax dollars, or the contributor gets a tax deduction for the contribution. Income tax on the funds is deferred until money is withdrawn from the account, either by the original contributor or by the person who inherits the account.
The items include:. If you received one of these as the beneficiary, you must report it as income. Report it the same way the deceased person would have reported it.
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