DEFINITION of 'Inheritance'

An Inheritance is all or part of a person's estate and/or assets that is given to an heir once the person is deceased. An inheritance is typically a cash endowment given to younger heirs; however, any assets can be considered as part of an inheritance, such as stock certificates or real estate. If a will is not in place at the time of death, determining the rightful heirs of the deceased's estate becomes a more complicated matter.

BREAKING DOWN 'Inheritance'

Inheritances often can be in the hundreds of thousands of dollars in value and, in most countries, inheritances are taxable. An inheritance tax is not necessarily an estate tax. An inheritance tax would aim to tax the heir who has received the inheritance, while an estate tax would apply to the assets of the deceased's estate.

Additional terms for an inheritance tax include a "death duty" or occasionally "the last twist of the taxman's knife." While there is no federal inheritance tax, individual states may assess inheritance tax. As of March 2018, only six states had inheritance taxes: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. (This is in contrast with 12 states and the District of Columbia, which have an estate tax.) In the majority of the states with inheritance taxes, any assets that a spouse bequeaths are exempt from inheritance tax. In some cases, the children are also exempt from or face lower rates of taxation. Beneficiaries with no familial ties have higher inheritance taxes than those with relatives.

The 2018 inheritance tax threshold varied based on the relationship between the decedent and beneficiary, along with the location. For example, in Nebraska in 2018, a parent, grandparent, sibling, child, or another lineal descendant (including those adopted) paid an inheritance tax of 1% on amounts over $40,000. In contrast, remote relatives, paid inheritance taxes of 13% on amounts over $15,000. All others, such as friends and distant relatives, paid inheritance taxes at a rate of 18% on amounts exceeding $10,000.

Inheritances and Trusts

Trusts can bring up challenges with regard to inheritance. Specific instructions as to how assets should be distributed are usually set out clearly in a grantor’s will; however, if a will is not finalized at the time of death, the matter can become more complicated, with various descendants arguing among themselves, with lawyers, and at times in court – especially if the inheritance sum is substantial or if the grantor is a high- or ultra-high-net-worth individual.

RELATED TERMS
  1. Estate Tax

    An estate tax is a tax on an inherited piece of an estate if ...
  2. Inherited Stock

    A stock that an individual obtains through an inheritance after ...
  3. Deceased Account

    A deceased account is a bank account, such as a savings or checking ...
  4. Taxable Estate

    The total value of a deceased person's assets that are subject ...
  5. Death Taxes

    Taxes imposed by the federal and/or state government on someone's ...
  6. Next Of Kin

    Next of kin is a person's closest living blood relative and may ...
Related Articles
  1. Investing

    3 Tips for Managing An Inheritance

    Consider these three tips before deciding what to do with an inheritance.
  2. Financial Advisor

    States With the Highest Inheritance/Estate Taxes

    State and federal estate taxes may be levied upon death, but there's a difference between inheritance taxes and estate taxes. Here's what you need to know.
  3. Managing Wealth

    ‘I Just Inherited Money’ Now What?

    If you’re fortunate enough to inherit money when you're young, here's how to hold on to it.
  4. Financial Advisor

    How Estate Taxes Work, A Real Life Example

    The estate tax is frequently misunderstood. Learn more details about exactly how estate, or inheritance, taxes work in the United States.
  5. Taxes

    Estate Taxes: Who's on the Hook?

    Inheritance taxes can be tricky. Most people have to deal with them at a very inconvenient time. It's better to learn the laws now so you're ready later.
  6. Financial Advisor

    How Advisors Can Assist Clients with Inheritances

    Leaving an inheritance can be complicated and even a burden on the recipient. Here's how advisors can help.
  7. Managing Wealth

    Want Your Will to Prevail? Don't Die Intestate

    If you die without making a last will and testament, you are said to have died intestate. What happens to your assets in this case?
  8. Retirement

    Making Sure Assets Go to Non-Spousal Heirs

    Save non-spousal heirs taxes on your estate by moving your assets from a qualified plan.
  9. Managing Wealth

    How To Choose The Right Executor For Your Estate

    Making a careful choice now can save your heirs from a lot of problems later.
  10. Retirement

    4 Reasons Estate Planning Is So Important

    Estate planning isn't fun, but without it, the consequences can be devastating for your heirs – or at least, not what you intended.
RELATED FAQS
  1. How is cost basis calculated on an inherited asset?

    Understand how the cost basis for stocks, property and other inherited assets is calculated, and the resulting tax implications ... Read Answer >>
Hot Definitions
  1. Capital Asset Pricing Model - CAPM

    Capital Asset Pricing Model (CAPM) is a model that describes the relationship between risk and expected return and that is ...
  2. Return On Equity - ROE

    The profitability returned in direct relation to shareholders' investments is called the return on equity.
  3. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  4. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  5. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  6. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
Trading Center