If you are about to inherit assets, you might need some inheritance tax advice. It comes down to understanding a few very basic rules. But if you ignore this issue, you could land in hot water and need to find IRS tax debt relief…big time.
First, keep in mind that there are really two kinds of taxes involved with the property of a person who dies. Inheritance tax is a tax that the person who receives the inheritance might have to pay.
Estate tax is levied on the estate without any consideration of who gets what. This is levied by the federal government for the most part, but some states levy an estate tax too. Estate taxes have to be paid before anything gets distributed.
Inheritance tax is a state issue. Only a handful of states levy this tax. And if you are lucky enough to live in a state that doesn’t (like most of us), you don’t have to worry about it. Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, Ohio, Washington and Pennsylvania currently have inheritance tax. Every other state doesn’t.
Now that you understand the basics, let’s see if I can really answer your question.
You see, when people ask me about “inheritance tax,” they really want to know if they have tax liability resulting from the death of the person who owned the assets. Well, you must understand that if there is a liability, somebody is going to have to pay it.
That’s why you have to make sure you understand the rules. It’s a basic foundation of family financial planning. If you aren’t careful, you might end up being that “somebody.” As I explained above, unless you live in one of the states that levies inheritance tax, you don’t have to be concerned about that. But you should be aware of the estate tax. Here’s why.
The person who is handling the distribution of the estate (the trustee or executor) is responsible for paying those estate taxes before she distributes the assets.
It’s in her interest to do so because she can be held personally liable for that debt. But what happens if the trustee or executor doesn’t pay that bill? Worse…what happens if that person doesn’t pay the estate tax, distributes all the assets and spends her share.
In that case, the federal government will come after you as a beneficiary. That’s why it’s so important to make sure the estate tax is paid even if you aren’t the trustee or executor.
How do you do this? Well…you can relax after the estate has filed a tax return and received a closing letter from the IRS. While Big Brother has three years to come back to you, chances are good that you’re clear.
Other than that, you have to be on your toes. If you aren’t the trustee, you can’t really control what she does. The only thing that makes sense is to stay on top of it. Keep the other beneficiaries aware of the need to file the estate tax return and pay the estate taxes if there are any.
While this isn’t an air-tight solution, it’s sure better than ignoring the problem and hoping that the executor or trustee does her job. Looking for the best way to avoid inheritance tax? Live in the right state. Want to avoid estate tax? Get the proper legal advice and consider getting a will or trust. Do it today. See LegalZoom to learn how easy it is to get your trust set up quickly.