Inheritance

What Is an Inheritance?

An inheritance is the property, money, or other assets that a person leaves to others after they die. Recipients may receive assets as heirs (by intestacy laws) or as beneficiaries named in a will, retirement plan, or life insurance policy. Inheritances can include cash, investments, real estate, vehicles, jewelry, art, and other tangible or intangible assets.

Inheritance vs. Estate Tax

• Inheritance tax is a levy on the recipient of an inheritance and varies by beneficiary relationship and state.
• Estate tax is imposed on a deceased person’s estate before distribution and typically does not apply to assets left to a surviving spouse or to most charities.
• Life insurance proceeds are generally not subject to inheritance tax.

States with inheritance tax
– Six U.S. states impose inheritance taxes: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
– Exemptions and rates vary by state; transfers to a spouse are commonly exempt, and closer relatives often pay lower rates than distant relatives or unrelated beneficiaries.

How Inheritance Taxes Work

Tax liability depends on:
– The state where the decedent lived or where the property is located,
– The value of the inheritance,
– The beneficiary’s relationship to the decedent.

Example: In some states, lineal relatives may pay a very low rate (or nothing) up to a threshold, while more distant relatives or nonrelatives can face substantially higher rates.

The Probate Process

Probate is the legal procedure used to validate a will (if one exists), pay creditors, and distribute a decedent’s assets.

Key steps:
– If there’s a valid will, a probate court reviews it and appoints an executor to administer the estate.
– If there is no will (intestate), the court appoints an administrator and distributes assets according to state intestacy laws.
– Probate resolves creditor claims and disputes among beneficiaries or heirs.

Beneficiaries vs. Heirs

• Beneficiaries: Individuals named in a will or on accounts/policies to receive specific assets.
• Heirs: Individuals entitled to inherit under state intestacy rules when there is no valid will.

Ways to Reduce Inheritance Tax Burden

Common strategies to reduce taxes and simplify transfer:
– Trusts: Placing assets in a trust can limit probate and may reduce tax exposure, depending on structure and state law.
– Lifetime gifting: Transferring assets before death can reduce the size of the taxable estate.
– Life insurance: Naming heirs as beneficiaries can provide tax-free liquidity to cover taxes and expenses.

Inheriting Retirement Accounts (401(k), IRAs)

Options depend on whether the beneficiary is a spouse and on plan rules:
– Spouse beneficiaries often can roll an inherited 401(k) into their own IRA, deferring taxes until distributions begin.
– Non-spouse beneficiaries should first review plan documents. Options may include:
* Lump-sum distribution (usually triggers immediate income tax).
* Taking distributions over a set period (commonly five or 10 years) to spread tax liability.
* Under certain conditions, taking distributions based on life expectancy.
– Consult the plan administrator and a tax advisor before choosing.

Inheritance and Bankruptcy

• In Chapter 13 bankruptcy, an inheritance received within 180 days of filing is typically treated as estate property and may need to be paid into the bankruptcy plan.
• Inheritances received after 180 days can be treated differently; courts vary on whether those funds must be used to repay creditors.

Finding Unclaimed Inheritances

• Check your state’s unclaimed property office (each state maintains records of unclaimed bank accounts, uncashed checks, and similar assets).
• Contact the decedent’s executor or the county recorder’s office to locate filed wills or estate records.

Conclusion

A clear estate plan—wills, trusts, beneficiary designations, and coordinating retirement and insurance accounts—can reduce taxes, avoid probate complexity, and help ensure assets pass to intended recipients. Because rules vary by state and by the type of asset, consult an estate-planning attorney or financial advisor to tailor strategies to your situation.