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.