I have reached the point of my life when I am considering estate planning services. I am thinking about writing a will. How will the Internal Revenue Service (IRS) treat inheritance. Is inheritance taxable?
What is inheritance? Inheritance is the transfer of cash, stock, automobiles, businesses, investment retirement accounts (IRAs) or real estate from a dead relative to their living relatives. Throughout history, tradition has established the right to pass on your wealth to your children.
There have been many battles over inheritance taxes (called death taxes). Many people don’t think it is fair to tax someone’s death assets. Wouldn’t the very concept of inheritance be damaged if these assets were taxed?
Another issue centers on productivity. What productivity has occurred during an inheritance? None. Many of the assets have already been taxed, so wouldn’t an inheritance tax be a form of double taxation?
Is Inheritance Taxable?
Thankfully, you have the right to leave an inheritance to your offspring. Many inheritance assets are not taxable. It is wise to write a will or create a family trust to ensure that your wishes are respected.
There are a few exceptions to this general rule. If you inherit an IRA or 401(k), this will be taxed eventually. If pre-tax income was used, then the entire distribution might be taxed. If post-tax income was used, only the interest will be taxed.
If you make money from an inherited asset, such as rental income, then that income is taxable. You might need to pro-rate the income based on when your relative died during the tax year.
You might be surprised to discover that the Internal Revenue Service is really cracking down on gifts. They have even established more rules for taxing grandparent gifts. This is one of the reasons why estate planning services are so beneficial.
You can set up a trust to offer some tax benefits. This can transfer assets legally without being subject to high tax rates. It might be a good way to protect your family wealth for the future generation.
Another key reason for the reduction of family assets is probate court. If you do not write a will (you are considered to be intestate), then your assets will be sent to probate court. Judges will distribute your assets, as they see fit.
Your will should be enough to prevent probate, but some have even added trusts as a secondary protection. Many governments are struggling to pay their bills and may use probate court to balance their budgets. But, be pro-active and organize your family estate to optimize the inheritance for your children.
Jim Treebold is a North Carolina based writer. He lives by the mantra of “Learn 1 new thing each day”! Jim loves to write, read, pedal around on his electric bike and dream of big things. Drop him a line if you like his writing, he loves hearing from his readers!