inheritance tax - how much we will pay?

babs77November 21, 2009

DH and I will be receiving a significant inheritance soon and are trying to determine how much inheritance tax we will need to pay on this amount.

I am trying to research this on-line but it is kind of confusing and I do not know how old some of the info I am reading is. Anybody have a reliable on-line resource or anyone out there with knowledge on this?

We live in Colorado if that makes a difference.

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The inheritance tax in the US is, to my understanding, acutally called an estate tax and it is not paid by the recipient, but by the estate of the deceased. Some states have other taxes, but it would depend on where the deceased person lives, not on where you would live.

This year, anything less than $3.5 million, is excluded.

If Granny died, all of her estate is valued, home, jewelry, etc. The estate pays the tax, or more accurately, the administrator of the estate pays from the estate's assets.

So if Granny had $1M and all goes to you, lucky you! If she had $10M and wants it distributed to all her grandkids and some charities, say 1/10 to each of ten recipients, then the estate pays the tax and distributes the remainder, which will be less than $1M each.

But if the estate is substantial, I'll recommend that you see your own tax expert ASAP, before you actually receive the moneys.

Here's an article with some overview info.

Here is a link that might be useful: Estate tax in the US

    Bookmark   November 21, 2009 at 5:04PM
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sushipup is correct - the estate pays the taxes, not you. Exemption is $3.5M this year, with residual over that taxed at 45%. Exemption is unlimited in 2010 but reverts back in 2011 to $1M previous limit/55% tax if Congress does not make any changes.

There is no CO estate tax, BUT there are state and federal estate income taxes that must be paid if the estate receives any dividend/interest payments before distribution to heirs is final.

    Bookmark   November 21, 2009 at 6:37PM
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Thanks sushipup and jkmom, great news that the amount they have sent us is what we'll actually get. We are currently receiving a monthly annuity payment that we already know will be taxed so we're prepared for that part. We do plan on making an appointment with a financial planner to get advice on what best to do with this inheritance.

Thanks again to both of you.

    Bookmark   November 21, 2009 at 7:48PM
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Not just a financial planner, but also see a tax expert.

Best of luck to you!

    Bookmark   November 21, 2009 at 8:17PM
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Just a word on inheritances and financial planners...

Please don't jump into anything. There is no rush. You might have found the best financial planner in the world, but many will try to steer you into "investments" that line their own pockets. This is especially true for clients that suddenly come into a large chunk of money.

Personally, I would find a fee only financial planner. That is someone who just gets a set fee (hourly or a flat amount) and gives you advice for that set period. Avoid anyone who is not 100% upfront about that fee and who pays it. Definitely avoid anyone charging a percentage of each transaction.

After that, go slow. If you get $1 million dollars, do not invest $1 million in anything. Put your $1 million dollars in something 100% safe (and boring) and then design a plan for how you are going to invest that money over time. It might be that you move 3% per month into something with risk - like stocks - until some fixed percentage of your money is in investments with higher possible earnings.

    Bookmark   November 23, 2009 at 9:20AM
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Would it depend on if the deceased is your mother and not a cousin or aunt? I thought it had to be from your mother or father to be exempt.

    Bookmark   November 23, 2009 at 11:23AM
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No. There are however specific rules about property taxes in certain states, and there are rules for various types of trusts, but I believe that those must skip a generation.

There are IRS rules about inheriting real property (not cash), which is valued at the time of the death of the owner.

    Bookmark   November 23, 2009 at 11:44AM
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>>Personally, I would find a fee only financial planner. That is someone who just gets a set fee (hourly or a flat amount) and gives you advice for that set period. Avoid anyone who is not 100% upfront about that fee and who pays it. Definitely avoid anyone charging a percentage of each transaction. >>

Although I don't disagree necessarily with most of your advice, I think it's far more important to find a good Registered Investment Advisor and check references from clients who have had at least a 5-yr track record with the RIA. Picking someone based on how they charge fees is not necessarily going to get you the best advice in every situation.

I do think for many people a fee-only RIA is fine...but for some, they really do benefit from the full-service and more comprehensive planning that asset-based RIAs offer. This is especially true in family situations (like ours), where several of us 'piggy back' on one main account.

    Bookmark   November 23, 2009 at 12:31PM
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bill-"Just a word on inheritances and financial planners...

Please don't jump into anything. There is no rush. You might have found the best financial planner in the world, but many will try to steer you into "investments" that line their own pockets. This is especially true for clients that suddenly come into a large chunk of money. "

Good advice. There will be many people sprouting out of the woodwork that will want to offer their "help" in managing your money. I would tell as few people as possible. I'd also suggest reading the book "Brokerage Fraud-What Wall Street Doesn't Want You to Know by Tracy P. Stoneman and Douglas J. Schulz."

It talks about the ways that brokers, financial planners, accountants, etc will use to pull the wool over your eyes in order to get their hands on your money.

If we'd had this book when we came into our money, we would have saved ourselves a lot of grief.

    Bookmark   November 23, 2009 at 1:30PM
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For a person who just comes into a whole lot of money, I think it is really important not to go to someone who is selling advice, not products. If you don't know a lot about investing, it is really easy to get taken advantage of. A scummy adviser is just going to see dollar signs and recommend all sorts of investments that they get large commissions on. I would ask any potential financial adviser how they get paid. If they can't tell you in 1 sentence, I'd find another adviser.

IMO recommendations for financial advisers are pretty unreliable. Unless they do something blatantly illegal, most people never know if the advise they are getting is really in their best interest. After all, Bernie Madoff's clients were recommending him right up until the bitter end. There were quite a few people who got into it based on the recommendation of family members. In fact, the ONLY way people got involved was via recommendations from someone they knew.

    Bookmark   November 23, 2009 at 1:49PM
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>>Bernie Madoff's clients were recommending him right up until the bitter end.>>

Madoff wasn't an RIA, and in fact wasn't even a broker until fairly recently. A basic financial guideline is that you NEVER make an investment check out to the advisor - it is always made out to the third-party institution holding the assets. You do not receive your account statements from your advisor; they should come from the financial institution or brokerage which has actual possession of your assets.

Just because some folks can't be bothered to make the effort to tell the good advisors from the bad advisors, doesn't make all advisors bad. Most people spend more time and thought into hiring handymen and general contractors to remodel a kitchen, than they will do to find a good advisor to handle their financial affairs.

    Bookmark   November 23, 2009 at 11:06PM
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Personally I would just stick it in the bank and see my accountant. Does the stock market have to go under completely before people understand that they are gambling with their money. In my own opinion, the principle is much more important than the interest I "might" make. My friend has her money in the stock market and can't take it out because of the huge loss she would take if she got out due to taxes. Two other friends lost money, one her entire savings, another enough of a loss that she couldn't buy the home she had put her money down on. My Sis lost $50,000. They are all very, very sorry they invested. Doesn't anyone pay attention when they hear this. There is no pot of gold, if someone finds it, they are just lucky.

    Bookmark   November 24, 2009 at 12:42PM
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Investing is always a risk. Buying a house, as events have shown, is a risk.

Walking across the street without looking both ways is a risk. I have a hard time convincing my very deaf MIL to stop walking down the middle of a parking lot aisle, especially when the cars would be entering the aisle behind her where she can neither see nor hear them coming.

Most people are 'set and forget' investors. Nothing wrong with that, depending on how you're setting things up. If you can't be bothered to learn the basic rules of diversification, asset allocation, and rebalancing, then putting your funds in a bank is fine - IF you are aware of the current FDIC insurance rule changes and their different expiration dates.

Once inflation turns up, you can watch your money shrink every month, but at least it will be 'safe'. How safe you'll be in the long run, is something only you can calculate. As long as you have sufficient funds, that's all that matters.

Luck is a good thing to have. Education and knowledge combined with it are even better. Adding in the power of the Net, it's amazing how much easier it makes many things, including investing and financial planning.

To be afraid of something is to let it have power over you and make you feel helpless. Finance is nothing magical or illusionary. Just because you cannot control this in its entirety, does not mean you can't manage your small portion of it successfully in a variety of ways.

    Bookmark   November 24, 2009 at 3:48PM
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I have seen none of that among my friends and families. In my opinion putting it in an insured savings account if better than investing in the market. I have made very good decisions in everything I do regarding money and spending. Everything I own is paid for and I have more than enough to see me through inflation. If that should happen I have a back up plan. As far as getting an education and learning the professionals are and they lose money.

    Bookmark   November 24, 2009 at 5:07PM
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maime, IMO your view of the stock market is too negative. Yes, many people have lost money in the market, many people have also made lots of money. Have you really seen no one among your friends and family make money over time in the market? I wonder how your friend lost ALL their savings in the market, their stock would need to go to zero, what were they invested in? Were they were invested in something risky like a naked option. Careful, informed investors can and do make much more money than putting money in a very low return savings account. Persons with enough savings can live well into their retirement on savings, but most people will quickly start spending their principle and may run out of money if they live long enough.
Expecting a pot of gold or a get rich quick invest is a scheme, and a sure fire way to lose money but painting all of the market as such a risk is just not an accurate picture for skilled knowledgeable investors.
The insured savings works for you, that is good and easy, it just doesn't work for many other people.
Inflation is an enemy that can't be ignored unless you are near the end of your life span.

    Bookmark   November 24, 2009 at 6:15PM
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Maime...with know so little about this topic you should avoid speaking. You really don't know what you're talking about.

Yo Babs77 listen to sushipup.

Basically, if you're the one inheriting, it will come to you tax free. Real estate gets stepped-up basis and you start clean. Tax problems of the estate are handled by executor before you get yours. Of course there are exceptions but you would be exceptional if you encountered them.

My past life was in financial advisory. I was one of those fee-for-service guys. Full disclosure/no commission or product-sales. I can't begin to tell you the messes I had to straighten out after the commission boys got their hands on these pots. And after they get it, they don't give it back.

    Bookmark   November 24, 2009 at 6:30PM
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Everyone is giving their opinion but I will not post again.

    Bookmark   November 24, 2009 at 8:35PM
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In my (extremely limited) experience the answer given above by sushipup MAY not be the whole answer. About ten years ago an aunt of mine passed away. Because she had no children and her husband was already dead, and because she left no will, her estate was divided equally between her siblings, and in my case since my mother (her sister) had already passed away, my mother's share was divided equally among her four children.

Her total estate was just under $1M so it was not subject to estate tax, and my portion ended up being around $24K. However next April as I was doing my taxes I got quite a surprise as I discovered I had to write the IRS a check for about $8K !

In my case, nearly the entirety of my aunt's estate was from her husband's 401K, and as it was explained to me: Since the money had been invested pre-tax over the years, whoever received the money had to count the money as income and pay income tax on it.

I don't know whether this info is applicable to your situation, but it certainly came as a big suprise to me, after I had read essentially the same info provided to you above.

    Bookmark   December 15, 2009 at 2:04PM
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Thanks, Bob, for illustrating a very good example of the type of thing that falls thru the cracks. But I think that if the estate took a full withdrawal on the retirement account, the estate still should have paid that tax before distributing it to you and the others.

Bottom line, is always consult a tax professional, and in this case, preferably one with experience in estates!

    Bookmark   December 15, 2009 at 2:24PM
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bob_cville brings up an important point which the rest of us had overlooked. As more and more people inherit 401k's and IRAs, it is critical to understand that one needs to make the correct decision in such a case, BEFORE the funds are distributed. For our parents this was not an issue, the grandparents of Boomers didn't have these type of accounts. However, for us and succeeding generations, it is incumbent upon us to be aware not only of the current laws, but any future changes that will made in those laws by Congress.

If you are inheriting any portion of an IRA, it's important that you know whether or not the owner was taking distributions. Once distributions are begun, they MUST be continued by the heirs. An IRA passed to multiple heirs may be split in any proportion the owner has specified. The heirs are best served by opening up a new IRA. Titling of this new IRA is very specific to avoid IRS problems.

I've excerpted part of a WSJournal article on this issue:

"...Inherited IRAs don't work like regular IRAs. If you inherit an IRA from anyone other than your husband or wife, you can't roll it into your own IRA. And you can't consolidate IRAs you inherit from different people into one account.

So, if the heir had withdrawn the assets from a parent's IRA and deposited them into her own IRA, she would have undone the inherited IRA, making all its assets taxable. She also would have to remove any assets she deposited in her IRA above her allowed IRA-contribution limit for the year -- $5,000 if she's under 50, or $6,000 if she's 50 or older -- to avoid further penalties.

But it appears that the account in question was left as is, except for being improperly titled. Thus, the error should be considered an administrative one that can be fixed. The reader would need to retitle the IRA so it's clear that the owner died and that she is the beneficiary.

Ed Slott, an IRA consultant in Rockville Centre, N.Y., recommends using this format: John Smith IRA/ Deceased 1/1/2009/ FBO Mary Smith as beneficiary. (note: FBO means "for the benefit of")

Make sure that the financial institution gets the titling right not only on the statements it sends to you, but also on the internal records it uses for reports to the IRS, he says. Some large IRA custodians use the beneficiary's name on the statements sent to him or her, but use the formal titling (as in the "John Smith" example, above) on the information it sends to the IRS to avoid confusing beneficiaries.

After you have retitled the inherited IRA, you can stretch out withdrawals from the account across your lifetime, rather than being forced to withdraw the funds sooner. That gives you a chance to extend the time that tax-deferred earnings can accrue, possibly increasing your inheritance."

    Bookmark   December 15, 2009 at 2:25PM
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>>But I think that if the estate took a full withdrawal on the retirement account, the estate still should have paid that tax before distributing it to you and the others. >>

In re-reading this thread, I realized this comment had not been addressed. I think I know why bob_cville encountered this problem.

Many people are not clear on what constitutes an estate for ESTATE TAX PURPOSES, which is different than asset distributions to heirs. I personally found this distinction very confusing at first!

Your estate consists of all your material assets, including personal and real property. If you live in a community property estate, any jointly held assets are valued at 50% to your overall estate value.

However, individual assets, including life insurance, annuities, and payable-upon-death (POD) accounts, are also included in your total estate value for estate tax purposes. For example, I hold $750K in life insurance policies. That money passes free of income tax to my beneficiary. But it must be counted in the worth of my combined individual/joint asset estate.

An IRA is a POD account; no financial institution will open an IRA for you without at least one named beneficiary. Therefore, the executor of your estate must count the IRA when calculating the total worth of the estate for tax purposes - BUT, the executor has no control legally over the IRA except to distribute it to the named beneficiary(ies).

This is a critical distinction. The IRA is handled as part of your overall estate for IRS purposes; however, the executor can make no changes to the IRA because as a POD account, it completely bypasses the probate system by being paid directly to the beneficiary(ies). All the executor can do is ask the inheritors how they want the funds transferred; it is their decision whether to cash out a retirement account or continue it in their own name(s).

Only if all named beneficiaries on a POD account have died prior to the owner of the account, will a POD account revert to estate ownership. Even in such case, I'm not sure if the estate has to pay the taxes before distribution, or if the IRS would bill the heirs instead. Because a rollover is not counted as a cash-out, anyone taking an inherited retirement asset by rolling it over into a new retirement account, would never incur an IRS levy until they actually took distributions.

It is always up to the heirs to decide how they want to receive their inheritance of a retirement account, which is why it is advisable to talk to a tax advisor or knowledgeable professional before one takes actual physical possession of any inherited assets.

    Bookmark   December 17, 2009 at 1:59AM
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I did not read all the responses, but I would suggest a good tax person that is a CPA, not a financial planner only. Most of us here are really not that knowleable in laws etc , but do make a list of some of the suggestions. The exector of the will has to give those receiving money certain documents that you will need to file and/or discuss with your tax person. Probably now would be a time to start because it will take awhile to receive those documents.

    Bookmark   December 17, 2009 at 2:41PM
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Actually, CPA designations only require a single course in tax planning. They are primarily accountants, not tax advisors.

A CPA tax specialist would be the CPA you would want to advise you on personal tax matters.

And actually, any good RIA would be able to advise you on the process of inheriting retirement accounts with minimal tax liability, although not on any estimation of what that tax liability amount would be. When I worked for a CFP, the administrative staff had to know every legal detail as to how retirement accounts were handled for both the owner's estate and owner's heir(s) - if an account was mishandled the CFP was personally liable because of his fiduciary duties.

    Bookmark   December 17, 2009 at 10:58PM
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I was wondering if anyone knows the rate we pay in MA for under $100,000 in inheritance money. This was a gift not the total estate

    Bookmark   March 26, 2013 at 7:37PM
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I don't know about the state, but for Federal taxes, the recipient does not pay the tax on a gift or an inheritance. Applicable taxes are paid by the donor or the estate.

    Bookmark   March 26, 2013 at 7:39PM
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From what I can see, MA does not have an inheritance tax so the estate will pay the tax.

However, for the above, although old comments about estate taxes -
Seven states, including PA where I live, do impose an inheritance tax on top of the estate tax! So the estate will pay a tax and the person inheriting will also pay, depending on how they're related to the deceased.

    Bookmark   April 11, 2013 at 10:00PM
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I know this is an old post but wanted to say there are no taxes to be paid on inheritance from an estate of less than $5 million. I saw my accountant today and I asked about inheritance taxes. She said there is none unless there is an estate of $5 million. I asked "even if you are not related", she said no. There is no inheritance tax on anyone under the amount I stated above. The reason is the taxes have already been paid by the person who earned the income. There are taxes to be paid on investments where taxes have not be paid. Money in IRA's, etc..

This post was edited by EmmaR on Fri, Dec 6, 13 at 8:48

    Bookmark   December 5, 2013 at 8:46PM
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Your bottom line answer is correct EmmaR but not for the reason you mentioned. US estate tax is completely separate from US income tax.

Here's an example - take a great-grandfather who owns a huge piece of land worth $20 million. The land is barren right now and produces no income. Assume he and the rest of the people mentioned in this saga have no other assets or debts. In a bad stretch of years for the family:

Great-grandfather dies in year 1 and leaves the land to his son (Gen 2).

In year 4, Gen 2 dies and leaves the land to his son (Gen 3).

In year 7 Gen 3 dies and leaves it to his son, etc

Estate tax gets paid with each death. If the value of the land stays the same and the estate tax rules stay the same, the amount of tax is the same each time. If the land really is a small shopping center and produces rental income but is still worth $20 million (and there are no other assets in each estate because the rental income iscompletely spent by the recipient every year), same result.

Yes, there are special rules for things like IRAs and other retirement plans, but that's because they exist under special tax rules and the money that went in produced a tax deduction at the time. The general rule is as I've outlined.

    Bookmark   December 6, 2013 at 1:47PM
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