Definition:
An inheritance is property or assets that someone leaves to an heir when they die – it can include real estate, money, stocks or bonds, jewelry, or other things.
An inheritance is what you receive when a loved one dies. In most cases, you inherit cash from a bank account or personal belongings. This can also include real estate and other items, and the value can range from a few hundred dollars to millions of dollars. You may have to pay taxes on the cash or property you receive, so you need to understand how probate works. A will is one common way that people can leave an inheritance to a loved one. Without a will, you can still inherit cash or property as an heir under state law. But each case is different.
In case you have a will
A will gives you more control over who inherits assets when someone passes away. If the deceased person left a will and you receive an inheritance, that person likely named you as the beneficiary.
Keep in mind that you may not receive anything, even if the will states that you should receive it. At the time of probate, the inheritance is distributed last. All administrative costs, taxes, and creditor claims are paid before the executor divides the assets among the beneficiaries according to the terms of the will, if the assets are subject to probate.
In case you don’t have a will
Without a will, a person is considered to have died “intestate.” Each state is responsible for creating its own inheritance laws. Where you live plays a significant role in how probate works. When you die without a will, state law uses intestate succession law to decide who gets the inheritance and how much of the deceased person’s estate each person gets.
What is the purpose of the beneficiary designation form?
Most life insurance policies, retirement accounts, and bank accounts allow you to designate a beneficiary. You can use a beneficiary designation form to indicate in writing to whom you want the money to be transferred to the account as an inheritance after your death. This replaces the need to list your beneficiaries in your will (for eligible assets).
If you are expecting an inheritance, taxes may be an important factor. The good news is that inheritances are not considered taxable income under federal income tax law. However, the IRS may require you to pay taxes on inherited property if you sell it.
Some states have an inheritance tax, which is levied on the person who inherits cash or other property. Since there are only six states in the U.S. that have an inheritance tax, don’t let it stress you out too much.
The following states have an inheritance tax:
- Iowa
- Nebraska
- Pennsylvania
- Kentucky
- New Jersey
- Maryland
The amount of tax you pay depends on your relationship to the deceased. State-level estate taxes vary from state to state. The federal estate tax is usually levied if the value of the estate exceeds $12.06 million in 2022. In 2023, that figure rose to $12.92 million.
And keep in mind that inheritance tax is separate from estate tax.
What to know
Installment payments are not the only way to limit inheritance payments. The estate planning person can also potentially dictate what you can spend your money on. For example, your expenses may be limited to medical expenses or college expenses.
Getting inheritance consultation is very important. An inheritance is not something that happens every day. It can be a once-in-a-lifetime event. Therefore, choosing the right decision about the disposition of an inheritance is very important
Depending on how large the windfall is, you may want to seek advice from a certified public accountant (CPA), insurance agent, financial advisor or investment professional to help you decide what to do with the assets you receive.