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Inheritance Tax Advice – What To Do BEFORE You Cash Your Check

by Neal Frankle, CFP ®, The article represents the author's opinion. This post may contain affiliate links. Please read our disclosure for more info.

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.

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Comments

  1. Evan says

    September 14, 2010 at 7:27 AM

    A lot of states actually have a State Estate Tax even if they don’t have an inheritance tax. For instance in New York it is a graduated tax above $1mil (you get a deduction off your federal for what you pay)…in NJ it is anything over $675,000.

    Inheritance and State Estate Taxes are different.

    Reply
  2. Spokane Al says

    September 14, 2010 at 7:08 AM

    WA also levies an inheritance tax.

    Reply
  3. Steve says

    September 14, 2010 at 3:55 AM

    Ohio also has an inheritance tax.

    Reply

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Who is Neal Frankle

Neal Frankle

I'm a CERTIFIED FINANCIAL PLANNER™ Professional with more than 25 years of experience. I feel very blessed and hope to share my personal financial experience and professional wisdom with readers of WealthPilgrim.
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Retirement financial education for people age 55+ seeking to retire well and for those retired seeking to enjoy a better retirement.  We discuss retirement planning, retirement investments, taxes in retirement, retirement spending, IRA and 401k distributions and we will personally answer questions that you pose in the video comments.

While so much financial information is about preparing for retirement, what about managing your finances in your retirement years? That's exactly what we cover at Retirement Crusaders.

Neal Frankle is a retired registered investment adviser. Larry Klein is a retired financial advisor and retired CPA. They have 70 years of financial advising experience to share so that you have your best retirement years.

Retirement financial education for people age 55+ seeking to retire well and for those retired seeking to enjoy a better retirement. We discuss retirement planning, retirement investments, taxes in retirement, retirement spending, IRA and 401k distributions and we will personally answer questions that you pose in the video comments.

While so much financial information is about preparing for retirement, what about managing your finances in your retirement years? That's exactly what we cover at Retirement Crusaders.

Neal Frankle is a retired registered investment adviser. Larry Klein is a retired financial advisor and retired CPA. They have 70 years of financial advising experience to share so that you have your best retirement years.

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Retirement financial education for people age 55+ seeking to retire well and for those retired seeking to enjoy a better retirement.  We discuss retirement planning, retirement investments, taxes in retirement, retirement spending, IRA and 401k distributions and we will personally answer questions that you pose in the video comments.

While so much financial information is about preparing for retirement, what about managing your finances in your retirement years? That's exactly what we cover at Retirement Crusaders.

Neal Frankle is a retired registered investment adviser. Larry Klein is a retired financial advisor and retired CPA. They have 70 years of financial advising experience to share so that you have your best retirement years.

Retirement financial education for people age 55+ seeking to retire well and for those retired seeking to enjoy a better retirement. We discuss retirement planning, retirement investments, taxes in retirement, retirement spending, IRA and 401k distributions and we will personally answer questions that you pose in the video comments.

While so much financial information is about preparing for retirement, what about managing your finances in your retirement years? That's exactly what we cover at Retirement Crusaders.

Neal Frankle is a retired registered investment adviser. Larry Klein is a retired financial advisor and retired CPA. They have 70 years of financial advising experience to share so that you have your best retirement years.

YouTube Video UCoU0buhwVplzXrsyf342nOg

Retirement Crusaders

June 10, 2022 1:19 PM

Subscribe
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