Home » A Simple Guide to Inheriting Money and Inheritance Tax

A Simple Guide to Inheriting Money and Inheritance Tax

Inheriting money is not always an easy process.

Aside from the emotional weight of receiving an inheritance, there are other factors that can complicate you getting what was set out in the will.

It is a good idea to be prepared in advance of making any difficult decisions so you can manage receiving an inheritance with a clear head.

How Will The Estate Be Distributed?

The distribution of the deceased’s estate depends on how the will was written. Either specific amounts of money or different items will have been left to individuals, or the estate can be equally divided among all the beneficiaries listed in the will. Aside from money, assets of the estate could include pieces of real estate, stocks, jewelry or other personal belongings.

Finalizing the Deceased’s Finances

The amount that you and the other beneficiaries receive may be reduced due to the settling of finances. The executor of the will is responsible for paying off any taxes or debts owed by the deceased using funds from the estate.

In the case where an estate is to be divided up equally, the executor is responsible for assessing the value of items in the estate.

Dividing an Estate With Other Family Members

Dividing an inheritance with family can be a turbulent time, particularly if there is any bad blood.

Ideally, the writer of the will would have discussed it with family members beforehand so there are no surprises. In the case where the distribution of the estate is not specifically allocated in the will, the beneficiaries will have to work with the executor and probate court to ensure they all get a satisfactory share.

Inheritance as Lump Sum or in Installments

When you have been specifically allocated money in a will, you might be expecting to receive it all at once. The writer of the will may feel that the recipient of an inheritance would spend a lump sum unwisely. They can specify that the inheritance is paid out over a number of payments, in intervals they set out.

Conditions on an Inheritance

The will may specify that a beneficiary can only receive their inheritance when specific conditions are met, such as reaching a certain age, graduating college or getting married.

They can also specify that the inheritance is legally only to be used for certain things such as college tuition.

Tax on Inheritances

There are two main types of taxes on inheritances: Estate Tax and Inheritance Tax.

Estate Tax

An Estate Tax is a federal tax that only affects very large estates. As of 2019, the entire value of the estate would have to be worth more than $11,400,000 to be taxed. This tax would be deducted before the estate is distributed to beneficiaries.

Inheritance Tax

An inheritance tax is only collected at the State level, and the good news is that the majority of U.S. states do not collect one.

If the deceased resided in these six U.S. states your inheritance may be taxed:

The amount your inheritance is taxed depends on the state and your relationship to the deceased. Spouses of the deceased do not pay any inheritance tax in any of those states.

If the deceased lived in one of those states, click the corresponding link above for more information.

Plan Carefully For The Future

If you inherited a large sum the amount of money could potentially change your life. It is advised that before you spend any of it, you stick it in a bank account and process your loss.

It is all too common that within ten years of inheriting money it is all gone. Your first order of business should be to pay off any outstanding debts. Keep some cash as an emergency fund, then start investing for retirement, your children, and your future.

Make sure that you divide your investments between low and high risk so you will always have some left if an investment falls through.

When you feel financially secure, then go ahead and have some fun.

To get a jump start on financial planning using newly acquired money, try our free financial planning tools.

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