Inheritance is when someone gets something that belonged to someone else. There are two ways something can be inherited. One way is through death and the other way is through a gift. Giving a gift is usually something that is done while the person is still alive, so it is not the form of inheritance that everyone is usually familiar with. Usually as a part of estate planning a person makes out a Will and decides who they want to inherit their possessions after they die. Sometimes the person planning their estate decides that it will be more beneficial for the person to start using the property before they die and decide to give it to someone as a gift.

The reason it is important to know what inheritance is, is because of the taxes that have to be paid. When someone transfers property to someone else through death the person receiving the benefit is responsible for paying taxes. There are different tax rates for gifts and property that someone inherits. Typically gift tax is higher than inheritance tax because the property has to be valued at over one million dollars before tax has to be paid on anything that is inherited.

These are the things that are important to know when you are trying to figure out what inheritance is. No matter if you are someone who is planning an estate or you are someone who is going to be a beneficiary in someone’s Will it is important to know about the tax rates that have to be paid and who they have to be paid by. Make sure to keep this information in mind so that you will be fully prepared and know how to plan more efficiently.

Typically taxes on inheritance have to be paid only by those who are inheriting an estate that is valued over one million dollars. There are ways that these taxes can be avoided if the planning process starts early enough. Tax-free gifts are one way to avoid paying federal inheritance taxes. The law allows for $13,000 to be given as a gift to someone tax-free each calendar year. Giving this money as a gift will reduce the estate and the tax liability.

There are also different trusts that a person will be able to use to shelter their estate. One trust involves splitting the trust between a person’s surviving spouse and their children. This type of trust is called an AB Trust and cuts the tax liability in half. Other trusts include: a “QTIP” Trust, Charitable Trust, and Life Insurance trust that all have different benefits. Most trusts do not work for the majority of people that want to use them. This is because the personal exemption of $5 million dollars makes them unnecessary. Unless the size of the estate is more than $5 million dollars it is not really necessary for you to use most trusts.

The only time a person has to pay taxes on inheritance is when someone fails to plan their estate properly. If the estate is over the current amount that is exempt from taxes then there will be an obligation to pay the tax that is owed. Making tax-free gifts is by far one of the best ways to lower the tax liability of the estate. Whether you are someone who is going to be the beneficiary of someone’s estate or you are someone who wants to be able to protect your loved ones when you are no longer here, taking the time to plan an estate is very important.