Do I Have to Pay Taxes on an Inheritance?


A lot of people wonder, Do I have to pay taxes on inheritance, when they are getting ready to inherit something that a loved one has passed down to them. Inheritance tax is something that has to be paid on assets and property that is passed from one person to another through death. There are ways to protect loved ones from the obligation of paying such taxes that an estate planner can assist you with if you are planning your estate. The following information will allow you to find out whether you have a tax obligation when you inherit the estate of a loved one.

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.