Planning for Inheritance Taxes Eases the Minds of Beneficiaries


Though people often think of receiving inheritance as being something of a free hand out, there are things that must be planned for when the even actually occurs. In certain states (given below), when family members or other beneficiaries receive inherited money or property on the death of a family member or other party, taxes must be paid to state governments. These are called inheritance taxes and are levied based on the value of the assets received by the beneficiaries.
It pays to factor these taxes into an overall financial plan on the part of the recipients. If they have only a vague idea of how much they will receive, this can result in poor planning and surprises later on. Knowing the actual liquidity and cash value of the money or property after the taxes have been taken care of gives beneficiaries a sense of security and clarity about what to expect.

Difference between Inheritance Tax and Estate Tax

Inheritance taxes are to be distinguished from estate taxes. Both occur upon the death and transfer of property from the donor. But estate taxes tax only the representatives of the deceased party. This tax is based on the total amount of the estate. Inheritance taxes, on the other hand, tax the amount a particular beneficiary receives, based on the value of the bequest.

There are three basic types of inheritance taxes:

Accessions Tax

The accessions tax deals with long term receipt of bequests by the donor. That is, it taxes the total amount that a person receives from a donor over his or her lifetime. This involves taxing things like trust funds, usually when they are above a certain amount in value.

Annual Inheritance Tax
An annual inheritance tax, as the name implies, taxes the amount of inheritance that beneficiary receives over the course of a year’s time.
Inclusion Tax
Inclusion taxes are a form of income tax – they count the amount of inherited money or assets received as income for the beneficiary, and tax it based on a total figure for the beneficiary’s income by adding it into all other income they have.

Advantages of Inheritance Taxes for Beneficiaries

Some consider inheritance taxes a more fair and equitable form of taxation than estate taxes. This is mainly because it allows wealth to be spread more evenly among the inheritance recipients by creating tax incentives: recipients can take advantage of whatever tax exemptions apply to them and the tax rate itself is usually progressive. With the estate tax, the total amount of the estate is simply taxed without regard to the status of its inheritors.

Inheritance taxes are state taxes rather than federal ones. Only eleven states in the US implement inheritance taxes. They are: Connecticut, Indiana, Iowa, Kansas, Kentucky, Maryland, Nebraska, New Jersey, Oregon, Pennsylvania and Tennessee.

Planning for inheritance taxes in states that use them is an important part of financial planning that can affect the financial decisions of the living beneficiaries. An estate tax could effect, for instance, planning to buy or pay off a house. Beneficiaries may be planning to buy a house or pay off a substantial amount of the mortgage upon receipt of a bequest by a decedent. They may be basing their idea of how much of the mortgage will be paid off by a certain time on the amount of money they will receive. If they fail to plan for an estate tax, this amount can be substantially higher than what they will actually inherit. If they fully understand how much will be levied in inheritance taxes, this will allow them to take out a mortgage with certain terms, interest rates, etc. If they do not, they could take out a shorter mortgage than they can afford and end up having trouble paying it off.
Inheritance tax planning is also important if a beneficiary is planning to sell a decedent’s assets. Often recipients of assets from decedents sell those items. If a certain amount has to be paid in tax on the items this may affect the price they ask for the item as well as any financial plans they have made based on the price they expect to receive.

It is up to beneficiaries to know what the inheritance tax laws in their states or residence are and to plan accordingly. If they find this a bit complicated, the help of informational websites, books, and tax accountants can come in handy. The main point is to get a firm handle the exact value of that which will come to beneficiaries when they inherit money or property so they can make fully informed financial decisions for the future.

This post was written by

jason – who has written posts on Budget Clowns.
Father of three and married to a lovely women. Always looking for ways to save money, and invest it properly for my children's future.

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