Inheriting any type of money is filled with mixed emotions. In the event you are in direct line to inherit an estate, you need to be tax conscious of what inheriting the estate can mean to you. How much federal tax you pay on inheriting estate has much to do with the amount of the estate and your relationship to the recently deceased. Having worked with several clients in the estate planning process, I’ve seen the highs and lows of the process. If you find yourself in this situation, here are some pointers to consider.
Inheritance Rules For Spouses and Nonspouses
Surviving spouses have little to worry about when inheriting an estate from their deceased counterpart. They will have little to no federal estate tax to worry about it. If you are a non-spouse (think children, grand-children), then that’s a different story. A nonpouse inheriting has the potential to be faced with not only federal estate tax, but depending on where they reside, their state can come knocking on the door looking for their cut.
As it stand right now 2010 is the year to inherit an estate that is represented in the chart below (compliments of Money Watch). In just over 6 months as 2011 comes into play, the estate tax is dropping back down to $1 million. Those with estates with over the $1 million mark will be forced to do some strategic planning soon. Very soon, if not already. Remember that you have the option of valuing the estate either at fair market value on the date of the death of the deceased or six months later.
Gift and Estate Tax
If you’re over the threshold and you haven’t done strategic planning with trusts, you’re currently looking at a tax rate of 45% for 2010. As the chart above indicates, that shoots up to 55% in 2011. Ouch!
These percentages don’t even include what your state may charge. Each state is different so be sure to double check with a qualified estate attorney to help you in the process.
Rules on Inheriting IRA’s
Typically, spouses who inherit IRAs may treat the IRA as their own and must begin required minimum distributions (RMDs) after age 70 1/2. RMDs. That is pretty straightforward and you can expect to pay ordinary income tax on the amount.
What about children, grandchildren and any one considered to be a nonspouse? The rules on inheritances is much different.
Nonspouses do not have the option to postpone RMD’s. They will have to transfer the money into what is called a inherited IRA or beneficiary IRA. You have two options of taking money from an inherited IRA.
- They may empty the account over a 5 year period or
- Take annual distributions, with the amount determined by the account balance and the beneficiary’s life expectancy.
The latter strategy may permit a larger portion of the account to grow tax-deferred and is often referred to as a stretch IRA.
Inheritance Rules Can Be Complicated
Don’t try to understand these inheritance rules on your own. Find a good estate attorney to assist you to make sure you and your are well protected.
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