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Frequently Asked Inheritance Questions
What happens if I die without a Will?
When a person dies without a will, how that person’s estate is inherited and by whom is determined by where the deceased lived and that state’s intestacy laws. Exactly who inherits and how much will depend on several factors including the value of the estate and how the assets were held. The assets in the estate without beneficiary designations will go through Probate to determine who will inherit them.
What is Probate?
Probate is the formal legal process to recognize the deceased’s will and appoint an executor (usually a family member named in the will) who will administer the estate and distribute assets to the intended heirs. Administration of an estate often takes approximately one year, so having an estate plan in place that avoids probate can hasten inheritance proceedings and can reduce attorney and court fees. If the will is in good order and is uncontested, the estate will pass through “administrative” probate and the court will simply oversee the executor’s execution of the will. If the deceased has no will or if the will is contested, the estate will pass through “judicial” probate where a judge will determine who are the rightful heirs based on that state’s intestacy laws.
What is the difference between an Estate tax and an Inheritance tax?
An Estate tax is levied on and paid by the estate of the deceased before any inheritance is distributed to heirs. The estate tax rates depend on the deceased’s state of residence. An Inheritance tax is levied on and paid by the heirs of the inheritance. Inheritance taxes are less common and rates depend on the heir’s state of residence.
Am I subject to Estate or Inheritance taxes?
It depends on where you live and how much your estate or inheritance is worth. The Federal government levies a country-wide estate tax on all large estates. Whether you are subject to additional state-level estate or inheritance taxes depends on where you live. See the "Is my inheritance subject to taxes?" section below to learn more.
Do I need to worry about RMDs from an Inherited IRA or 401(k)?
Yes. If you inherit Roth IRA assets, you will not be subject to any taxes when you withdraw the assets from the account. However, if you inherit Traditional IRA assets, you will be subject to full income tax when you withdraw the assets from the account. Required Minimum Distributions (RMDs) force you to withdraw a portion of your IRA account each year, which forces you to incur and pay the withdrawal’s applicable taxes. IRAs inherited after Jan. 1, 2020 are subject to the 10-year rule, with some exceptions. The 10-year RMD rule requires that the entire balance of the participant's Inherited IRA account must be withdrawn within 10 years of the death of the original owner. This means that you can withdraw 1/10th of the account each year for 10 years until it is empty or can let the investments ride tax-deferred in the account for 10 years and withdraw 100% of the account in the 10th year. For Inherited Roth IRA accounts, letting the investments ride for 10 years is usually the recommendation because you get 10 years of additional tax-free growth. (If you instead withdraw the assets today and invest them in a non-qualified account, you would be subject to capital gains taxes when you sell the investments in the future.) For Inherited Traditional IRA accounts, letting the investments ride for 10 years is usually not recommended because you would have to pay full income tax on the full amount on the 10th year. If the account is large enough, this can push you into the highest tax bracket and cause you to pay more taxes than necessary. It is usually recommended to withdraw a portion of the Inherited Traditional IRA each year to spread out the tax burden. You can also avoid paying taxes on the assets by giving the assets to an approved charity through a Qualified Charitable Distribution (QCD). The exceptions to the 10-year rule are for certain types of beneficiaries: – A surviving spouse – A disabled or chronically ill person – A child who hasn't reached the age of majority – A person not more than 10 years younger than the IRA account owner Please speak to a financial advisor to learn more about QCDs and to determine what inheritance rules apply to you.
How should I invest my inheritance?
How you should invest a windfall, like an inheritance, depends on a lot of factors unique to you. Usually, taxes are not a limiting factor on whether you should reallocate the investments in an inherited account. Keeping the old investments you have just inherited is not a common recommendation. Many assets held by older investors are in investments that either charge higher fees than modern investments or are not optimized for the current market environment. Many of these legacy investments are held because the legacy investment had a large taxable capital gain which would have had to been paid if it was sold during the deceased’s life. However, now that the capital gain has been nullified through the inheritance process, you can sell that legacy investment for a more efficient modern one. Inherited IRAs are qualified tax vehicles and do not incur taxable events when trading / rebalancing is done within the account (only when money is withdrawn from the account). Non-qualified inherited accounts, like a brokerage account, will have had a step-up in basis on the day the deceased died. If you received your inheritance promptly, any taxable gains or losses would be minimal or negligible. Additionally, any capital gain or loss that is the result of selling inherited stock is always long-term. You can use your inheritance to invest in anything you want. However, be careful to align your investments with your risk tolerance and your time horizon; do not invest in anything too risky. Inherited IRAs have RMDs that require you to sell and distribute a portion of your investments in the account each year to pay taxes on them. You should not invest extremely aggressively in an Inherited IRA by planning to hold those investments long-term, since you will likely be required to sell that investment in a few years regardless if it has gains or losses. We offer professional investment management at Silverstone Financial and would be happy to help you invest your inheritance in a way that aligns with your goals and avoids unnecessary taxes.
Is my inheritance subject to taxes?
The federal government does not impose an inheritance tax, however there is a federal estate tax. The federal estate tax ranges between 18% and 40%, with the majority of assets subject to estate tax being taxed at that higher 40% rate. The combined gift and estate tax exemption amount is $12,060,000 for 2022. The exemption is expected to be cut approximately in half in 2026 when the Tax Cuts and Jobs Act of 2017 expires. Proper estate planning with a qualified financial and legal professional can prevent your estate from paying unnecessary estate taxes.
Maryland is the only state with both an estate and an inheritance tax. The Maryland estate tax ranges between 0% and 16% on assets subject to estate tax. Maryland’s combined gift and estate tax exemption amount is $5,000,000 for 2022. The Maryland inheritance tax is 10% on assets subject to inheritance tax. A primary residence that is owned by domestic partners held in joint tenancy at the time of one partner's death is exempt from the Maryland inheritance tax. Property passing to a spouse, child or other lineal descendant, spouse of a child or other lineal descendant, parent, grandparent, stepchild or stepparent, or siblings is also exempt from taxation.
Beginning in 2023, Connecticut’s estate tax rate is set at a flat 12% and uses the federal combined gift and estate tax exemption amount ($12,920,000). The maximum amount of tax that will be levied is $15 million for inheritance or gifts occurring after January 1, 2019. Connecticut is the only state with its own gift tax.
The Hawaii estate tax ranges between 10% and 15.7% on assets subject to estate tax. Hawaii’s estate tax exemption amount is $5,490,000. Hawaii has no gift taxes.
The Illinois estate tax ranges between 0% and 16% on assets subject to estate tax. Illinois does not have estate tax exemption, and instead levies their estate tax on the full estate, if the estate is worth more than $4,000,000. Illinois has no gift taxes.
The Maine estate tax ranges between 8% and 12% on assets subject to estate tax. Maine’s estate tax exemption amount is $6,010,000 for 2022. Maine has no gift taxes.
The Massachusetts estate tax ranges between 0% and 16% on assets subject to estate tax. Massachusetts does not have an estate tax exemption, and instead levies their estate tax on the full estate, if the estate is worth more than $1,000,000. Massachusetts has no gift taxes.
The Minnesota estate tax ranges between 13% and 16% on assets subject to estate tax. Minnesota’s estate tax exemption amount is $3,000,000 for 2022. Minnesota has no gift taxes.
The New York estate tax ranges between 3.06% and 16% on assets subject to estate tax. For 2022, estates worth less than $6,110,000 are not taxed in New York. If the estate is worth more than $6,110,000 but less than 105% of that amount ($6,415,500), then the estate is taxed 3.06% on the assets above $6,110,000. If the estate is worth more than 105% of $6,110,000, then the entire estate is taxable with no exemption. New York has no gift taxes, but will include any gifts given in the last 3 years in the estate.
The Oregon estate tax ranges between 10% and 16% on assets subject to estate tax. Oregon’s estate tax exemption amount is $1,000,000 for 2022. Oregon has no gift taxes.
The Rhode Island estate tax ranges between 0% and 16% on assets subject to estate tax. Rhone Island’s estate tax exemption amount is $1,648,611. Rhode Island has no gift taxes.
The Vermont estate tax rate is set at a flat 16% on assets subject to estate tax. Vermont’s estate tax exemption amount is $5,000,000.
The Washington (state) estate tax ranges between 10% and 20% on assets subject to estate tax. Washington (state)’s estate tax exemption amount is $2,193,000 for 2022.
The Washington, D.C. estate tax ranges between 12% and 16% on assets subject to estate tax. Washington, D.C.’s estate tax exemption amount is $4,254,000 for 2022.
Iowa inheritance tax is not imposed on spouses, children, and parents of a deceased person. Inheritance to any brother, sister (including half-brother, half-sister), son-in law, and daughter-in-law are taxed between 4% and 8%. Inheritance to any uncle, aunt, niece, nephew, foster child, cousin, brother in-law, sister-in-law, and all other individual person are taxed between 8% and 12%. Iowa is expected to repeal the inheritance tax by 2025.
Kentucky inheritance tax is not imposed on spouses, parents, children, stepchildren, grandchildren, and siblings, including half-siblings. Inheritance to any nephews, nieces, half-nephews, half-nieces, children-in-law, aunts, uncles and great-grandchildren are taxed between 4% to 16%, with a $500 exemption. Inheritance to all other relations are taxed between 6% to 16%, with a $500 exemption.
Nebraska inheritance tax is not imposed on spouses. Inheritance to any parents, siblings, children, grandparents and any spouses/descendants of these relatives are taxed 1% on any value over $40,000. Inheritance to any aunts, uncles, nieces, nephews and any spouses/descendants of these relatives are taxed 13% on any value over $15,000. Inheritance to all other relations are taxed 18% on any value over $10,000.
New Jersey inheritance tax is not imposed on any spouse, civil union partner, domestic partner, child, grandchild, great-grandchild, parent, grandparent, mutually acknowledged child or step-child. A variety of tax rates and exemptions apply based on the class of relationship.
Pennsylvania inheritance tax is not imposed on any spouse or parent, if the child is under the age of 21. Inheritance to any direct descendants and other lineal heirs like grandchildren are taxed 4.5%. Inheritance to any siblings are taxed 12%. Inheritance to all other relations are taxed 15%.
*Information updated as of 2022. Please see your state's website for additional information on inheritance taxes and procedures.
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