An inheritance can be life-changing but also present complex legal challenges. According to an HSBC survey, Americans leave nearly $177,000 on average to their heirs after retirement. However, due to complicated laws, inheritance and Wills don’t always go as planned.
The legalities involved in inheriting money and property are complex. Therefore, it is essential to familiarize yourself with the process and seek professional help during probate.
Here is a guide to the fundamentals of inheritance law and its standard provisions.
What is probate?
Probate is the legal process during which the court and an appointed executor are responsible for property distribution after the owner’s death.
Will is a legal document in which the property owner provides details about an executor, beneficiaries, heirs, and inheritors of the assets upon his/her death. An executor is legally allowed to manage, secure, or gather the estate’s assets. An executor can also be a beneficiary of the Will. In the absence of a Will, however, most jurisdictions have an intestacy law in place to determine the basis of inheritance distribution.
What to know when you inherit assets
The type of asset you are receiving determines the best course of action.
- The government doesn’t tax cash inheritance as income, but you have to pay federal, state inheritance, or estate taxes if the amount exceeds a certain threshold.
- Retirement accounts are the most complicated inheritance asset. Traditional retirement accounts such as Individual Retirement Accounts (IRAs) and 401(K) are taxed as income, while Roth accounts are not.
- Securities or real estate are subject to a “step-up in basis” change in value upon the owner’s death. The value adjustment becomes the new baseline, and the person inheriting these assets only owes taxes on subsequent growth.
- In a life insurance policy, the beneficiary receives financial help, which is typically tax-free.
Difference between estate and inheritance taxes
Estate taxes are levied on the total value of a deceased person’s money and property. The owner of the estate pays the tax before the beneficiaries can receive their share.
The US federal government does not levy an inheritance tax. However, Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania are six states where inheritance is subject to taxation.
Inheritance tax exemptions
- The widow or widower of the deceased is exempt from inheritance tax in all six states.
- Children are either fully exempt or pay a low rate of inheritance tax.
- Other relatives may have to pay a reduced tax rate on an amount that exceeds a certain threshold.
- In some states, charitable organizations are exempt from paying inheritance tax.
About MT Paralegal & Consulting for Wills & Estates
If you have recently inherited assets and lack knowledge about your rights and responsibilities, we offer Wills and estate planning expertise. MT Paralegal & Consulting ensures that the probate process is transparent and cost-efficient. MT Paralegal, one of the best legal consulting firms, can refer you to our network of attorneys for more complex cases. Reach out to us at 240-230-7925 or michelle@mtparalegal.com and let us simplify the probate process for you.
