Someone died to leave you an inheritance. Inheriting money sounds great on the surface. Visions of plasma TVs, tropical vacations, and better schools for the kids all dance through your head. However, the reality often is somewhat different.
First, you may have grieving to do. If the person was close to you, you may have to work through emotional issues before spending that inheritance.
Next, you may not want the inheritance. I know that sounds crazy, but it is true—you may want to refuse or “disclaim” the inheritance. By doing this, it would go to whomever it would have gone if you were dead. Typically, this is your children. Depending on your assets, your liabilities, etc., you may prefer having it go to your children, especially if it would be in trust.
Inheritances and gifts are not subject to income taxation. So, when Aunt Mary leaves you her house, you do not have to report that on your income tax return. In fact, even if Aunt Mary paid very little for the house, if you sell it, you may not have to pay any tax even then. Upon Aunt Mary’s death, the “basis” in the house, typically what Mary paid for it, is changed to the fair market value for the house on her death. In other words, you only pay a capital gain on the increase in value from her death.
Some inheritances, such as IRAs, may be subject to income taxation, just as they would have been income taxable in the hands of the person who gave it to you. However, this is a rarity and, in general, inheritances and other gifts are not subject to income taxation.
Practically speaking, you may not get your inheritance immediately. Assets must be inventoried, debts must be paid, court approval may need to be obtained. If the estate is large enough to be subject to estate taxation, the executor or trustee must file a federal estate tax return and your share of the tax may come from your inheritance. If they make any distributions prior to paying the government its cut, they are responsible personally for any shortfall. For this reason executors and trustees are reluctant to make distributions until after the government has been paid and issued a “closing letter” which releases them from liability. The tax return is due nine months after the date of death, but may be extended. The closing letter typically is issued six months after that. So, if the executor or trustee doesn’t give you your money until a year or eighteen months after the individual’s death, they may have legitimate reasons for the delay.
An estate planning attorney can help you be sure that you are getting your inheritance without unfair delay or reduction. Further, that attorney can help you decide regarding “disclaimer” and can help you prepare a new estate plan of your own with the new circumstances in mind.
Compliments of the McGee Law Firm, Attorney Brandon McGee
Written By: The American Academy of Estate Planning Attorneys