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

    An estate is the collective sum of an individual's net worth, ...
  2. Death Taxes

    Death taxes are taxes imposed by the federal and/or state government ...
  3. Next Of Kin

    Next of kin is a person's closest living blood relative and may ...
  4. Disclaimer Trust

    A disclaimer trust is one that has embedded provisions that allow ...
  5. Step-Up In Basis

    Step-up in basis is the readjustment of the value of an appreciated ...
  6. Five-Year Rule

    The Five-Year Rule allows inherited IRA beneficiaries to withdrawal ...
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. Retirement

    Why Estate Planning Isn't Just for the Rich

    Estate planning isn't just for the wealthy. These estate transfer strategies can help you leave more to your heirs.
  5. 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.
  6. 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.
  7. Personal Finance

    4 Things Not to Do After Receiving an Inheritance

    Your inheritance may seem like a lot of money, but that doesn't mean you shouldn't make smart decisions about saving or spending it.
  8. Retirement

    Expecting a Big Inheritance? Don't Count on It!

    A new study from Ameriprise Financial suggests that Boomers and their kids need to talk frankly about inheritance expectations
  9. Retirement

    The Tax Implications of Inheriting Assets

    Whether you are passing on assets or inheriting them, it's crucial to be aware of the tax consequences.
  10. Financial Advisor

    Top Estate Planning Tips for 401(k)s and IRAs

    Here's how to avoid estate planning pitfalls when it comes to leaving IRA and 401(k) assets to heirs.
Hot Definitions
  1. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  2. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  3. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  4. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  5. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  6. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
Trading Center