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How Inheritance Tax Affects Heirs

Mar 26, 2008
Inheritance tax is imposed on most property transferred to heirs. Nearly all inherited property is taxed at the federal level and tax rates are based on the fair market value of the property. The amount of inheritance tax is determined by the appraised value of the estate as well the beneficiary's relationship to the decedent.

Most inheritance property is bequeathed to heirs through a Will or Living Trust. Two types of property can be gifted through a Will -- specific gifts and general gifts. Specific gifts include items such as jewelry, heirlooms, coins, stamps and other collectibles. General gifts include items which remain after the Specific gifts are distributed. The bulk of most estates usually consist of General gifts. Individuals who receive General gifts are known as "principal heirs". Every Will or living trust must assign at least one principal heir.

Typically, state inheritance tax is not imposed on property passed to a surviving spouse. Property gifted to children, family or friends may be subject to state taxes. Inheritance taxes are governed by each individual state. Currently, 10 of the 50 states within the U.S. impose inheritance tax on property passed to heirs. Individual states which impose inheritance taxation include: Indiana, Iowa, Kansas, Kentucky, Maryland, Nebraska, New Jersey, Oregon, Pennsylvania and Tennessee.

To complicate matters further, each state's inheritance laws vary considerably. Some states adhere to federal estate tax law, while others operate independently. Many states do not impose inheritance tax unless the estate is subject to federal tax. Therefore, it's vital to consult with a tax attorney to understand what, if any, inheritance laws are applicable.

When an individual is designated as the Beneficiary, s/he may be liable for both federal and state inheritance taxes. Technically, inheritance taxes aren't imposed on the property. Instead the taxes are charged for the right to assume ownership of the property.

The Estate Executor is required to submit an inheritance tax return which includes a list of the estate property and its value, along with a list of outstanding debts. This is referred to as the Gross Estate. Once all of the estate property is appraised, outstanding debts are deducted in order to compute the value of the estate each heir receives.

Debts and taxes owed by the decedent must be paid from the estate before distribution can be made to heirs. Funeral expenses and estate administration costs are usually deductible expenses which are not subject to taxation.

Inheritance tax returns must be filed through the Probate Court in the county where the decedent resided. Federal law requires this return must be filed within nine months from the date of death. If taxes are due, they must be paid in full at the time of filing. If the inheritance tax is not paid in full by the deadline, the balance due will be subject to late penalties and interest.

Because of the complexities of inheritance law, it's essential to seek legal counsel to ensure tax returns are filed in a timely manner and appropriate taxes are paid. Should you require the services of a lawyer, seek out those who are well versed in Inheritance Law.
About the Author
Simon Volkov is a private real estate note investor who specializes in helping individuals liquidate their assets. From forthcoming Inheritance windfalls to Probate, Simon Volkov offers a host of solutions for those in need of cash. Learn more by visiting www.SimonVolkov.com.
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