What is an Inheritance?
An inheritance is property or assets that someone leaves to an heir when they pass away — it might include real estate, money, stocks or bonds, jewelry, or other belongings.
🤔 Understanding inheritance
An inheritance is what you receive as a beneficiary after someone you care about has passed away. Most of the time, you inherit cash from a bank account or personal belongings. It can also include real estate and other items, and the value can range from a few hundred dollars to millions of dollars. You might have to pay taxes on the cash or property you receive, so you must understand how inheritance works. A will is one common way that people can leave an inheritance to a loved one. Without a will, you might still inherit cash or property as an heir under state law. Please consult an attorney, accountant, or other appropriate professional for inheritance advice specific to you.
One common way to receive an inheritance is through a will. If Sally passes away and leaves behind a daughter named Susie and a son named Jeff, she can give some of her belongings to them in her will. If Sally wants Susie to have her house when she passes away, the house is Susie’s inheritance. Since Sally gave Susie the house, she might leave Jeff her portfolio of stocks and bonds. She could also leave an inheritance to her favorite charity. If Sally dies without a will, state law determines how her assets are divided. Susie and Jeff can still receive an inheritance, but the distribution might be different than what Sally would have wanted had she written a will.
An inheritance is like a gift...
You may or may not know what your parent, grandparent, or other loved one plans to give you — The gift they leave as an inheritance may be unexpected, though it’s something you may cherish as a lasting legacy from them.
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- What is an inheritance?
- How does inheritance work?
- Do you pay taxes on an inheritance?
- Who gets an inheritance?
- What should you know about inheriting money?
- What should you do with your inheritance?
What is an inheritance?
An inheritance is when someone leaves you something after they pass away. Did your uncle die and leave you his antique coin collection? Or maybe your grandmother left you a big windfall of cash after she passed. Both of those are examples of what inheritance might be.
You have some control over what happens to your property after you’re gone. Estate planning can help you plan the inheritance you leave — If you want your things to go to specific members of your family, friends, or an organization, you can make arrangements through estate planning.
You might use a will to spell out how you want your belongings distributed after you’re gone. A trust is an alternative to a will that can accomplish much the same thing. When it comes to dispersing your inheritance, wills and trusts follow a different set of rules and laws. Talking to an attorney and/or an accountant or financial planner can help you decide which is best for you.
How does inheritance work?
There are a few ways inheritance can work. As part of the estate planning process, you can decide who will inherit from you when you die. If you don’t make arrangements ahead of time, a probate court will determine what happens to your estate.
With or without estate planning, the result is similar: Your assets will transfer to your survivors. You may have to follow a different process depending on the method you choose.
How does inheritance work with a will?
A will gives more control over who inherits the assets when someone passes away. If the decedent left a will and you get an inheritance, that person likely named you as a beneficiary.
Keep in mind that you might not get anything even if the will says you should receive it. During probate, inheritance is the last thing to be distributed. All costs of administration, taxes, and creditor claims are paid before an executor divides property among beneficiaries according to the terms of a will if the assets are subject to probate.
What if you don’t have a will?
Without a will, the person is said to have died “intestate.” Each state is in charge of creating their own estate laws. Where you live plays a significant role in how inheritance works. When you die intestate, state law uses the law of intestate succession to decide who gets an inheritance, and what portion of the deceased’s assets each person receives.
What is the purpose of a beneficiary designation form?
Most life insurance policies, retirement accounts, and bank accounts allow you to name a beneficiary. You can use a beneficiary designation form to record in writing who you want to receive the money in the account as an inheritance after you’re gone. This replaces the need to have a list of your beneficiaries in your will (for the applicable assets).
Do you pay taxes on an inheritance?
If you’re expecting an inheritance, taxes can be an important consideration. The good news is that inheritance is not considered taxable income under federal income tax law. However, the IRS may require you to pay taxes on inherited property if you sell it.
Some states have an inheritance tax that charges the person who inherits cash or other property. Since there are only six states in the U.S. that have an inheritance tax, don’t let it stress you out too much. States that do charge this type of tax are:
- New Jersey
The amount of tax you pay depends on your relationship to the decedent. If you lived in Pennsylvania, for example, your responsibility for inheritance tax would be:
- 0% if you’re a surviving spouse, or a parent of a child aged 21 or under
- 4.5% if you’re a child or direct descendant of the deceased
- 12% if you’re a brother or sister
- 15% if you’re any other relation
For example, if your grandmother left you $40,000 when she passed, you may have to pay an inheritance tax of $1,800 based on that fee structure (4.5%).
Note that an inheritance tax is separate from an estate tax. An estate may have to pay a tax, if it is over a certain amount, before distributions are made to beneficiaries. Estate taxes at the state level vary by state. Federal estate tax is generally required if the estate is over $11.58 million in 2020.
Please consult an appropriate professional, such as an accountant or an attorney, for tax advice specific to your situation.
Who gets an inheritance?
Who gets an inheritance depends on how much estate planning a person does before they pass away. If you don’t do a will, trust, beneficiary form, or any other estate planning, the probate court decides who gets an inheritance.
Let’s say there was a will. In that case, the will dictates who will receive what. If you pass away and leave $10,000 to each of your two children in your will, the estate executor would be in charge of making sure that happens.
For life insurance policies and retirement accounts, the person you listed as the beneficiary is who will inherit the payout. The beneficiary designation form usually includes space for a primary and contingent beneficiary. This way, if the primary person doesn’t survive you, the contingent beneficiary can receive the money instead of it becoming part of your probate estate.
What should you know about inheriting money?
Generally, getting an influx of assets would seem like a good thing. Since inheritance usually comes when someone you love dies, it can be a sensitive subject for families. The legal process that governs the distribution of cash or property is complex, and that can add more worry to an already stressful situation.
To help you better handle the situation, you should know a few basic things about inheriting money.
There’s a difference between lump sums and installments
If you’re expecting an inheritance, you might be thinking about what you’ll do with a big lump sum of cash or property. Sometimes the distribution spans several installments. You might get some money now and the rest when you reach a specific milestone, such as graduating from college or getting married.
Inheritance can come with restrictions
Installments aren’t the only way inheritance payouts can be restricted. The person doing the estate planning can also potentially dictate what the money can be spent on. For example, your spending may be limited to medical or college expenses only.
Consult a professional
Inheritance isn’t something that happens every day. It might be a once in a lifetime event. Just because some cash is headed your way doesn’t mean you’ll be set for life. An inheritance, no matter how big the payout might be, doesn’t guarantee long-term financial stability. Plus, when a loved one dies, you might not be thinking clearly. Instead of making decisions you’ll later regret, you may be well-advised to talk to a professional.
Depending on how large the windfall is, you may want to seek advice from a Certified Public Accountant (CPA), insurance agent, financial advisor, or investment professional to help you decide what to do with the assets you receive.
What should you do with your inheritance?
The main thing to remember if you receive an inheritance is that you generally don’t have to make any major decisions right away.
If you’re not sure what to do with it, consulting a professional can be a smart move. You may be emotional from losing someone you love. You may want to take some time to mourn before making decisions about what to do with the windfall you receive. And that’s okay. When you’re ready, you can decide what’s right for you.
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