If You Do Not Want to Accept an Inheritance
If you are the beneficiary of a will or trust but do not want to receive the inheritance, you may be able to use a disclaimer to allow the inheritance to pass to someone else, such as your children. The potential benefits of disclaiming an inheritance include reducing estate and gift taxes or allowing a beneficiary that is in greater need to receive the property. If you disclaim an inheritance, you are not deemed to have ownership of the inherited property, but you must disclaim before you have accepted any benefit of the inheritance.
If a beneficiary or heir disclaims an inheritance, the property will be distributed or transferred as if the beneficiary predeceased the testator or grantor. A disclaimed inheritance will pass to the next beneficiary or heir in line in accordance with the terms of the will, trust or the laws of intestate succession. When a beneficiary disclaims an inheritance, the beneficiary has no ability to influence how the disclaimed inheritance should be distributed. If you are considering disclaiming an inheritance, consult an estate planning attorney or tax advisor. There are time limits for disclaiming an inheritance and it must be properly documented.
If You Were Disinherited
State intestacy laws often provide inheritance rights to spouses, children and other heirs if such heirs were not properly disinherited in a decedent's will. For more information on disinheritance, see Disinheriting An Heir. For information on how to object to a will or file a will contest, see Will and Trust Disputes. Before taking legal action to have a will or revocable living trust declared invalid because you were disinherited or received a lesser share of the estate than you expected, talk to an attorney about the ramifications of any no-contest or forfeiture clause in the decedent's last will or trust.
Know Your Basis in Inherited Property
If you inherit property, ask the executor of the decedent’s estate for a copy of the estate tax return. The estate tax return contains information that may be used to determine your basis in the inherited property.
Determining your basis in inherited property can be complicated, especially if you inherit property from a person that passed away in 2010. This is due to the enactment of the new tax act signed into law on December 17, 2010. Consult a CPA or accountant for assistance in determining your basis in inherited property.
If You Inherit Property as a Surviving Joint Tenant
For federal and state tax purposes, your basis in property you inherit as a surviving joint tenant may depend on several factors, such as whether the deceased joint tenant was your spouse or a non-spouse, whether the inherited property was community property, whether the inherited property was your residence or rental property, how the property was acquired, and the date on which the joint tenancy was created.
What is the Inheritance Tax?
Inheritance tax is a tax some states impose on the beneficiaries of estates. Sometimes called a death tax, an inheritance tax is based on the right of the beneficiary to receive property owned by the deceased at death. An inheritance tax is levied only on an individual beneficiary’s inherited portion of the estate, not the entire estate. The amount and rate of inheritance tax is based on such factors as the value of property received by the beneficiary and the beneficiary’s relationship to the deceased. The inheritance tax must either be paid by the executor or administrator of the estate or the beneficiary or transferee receiving the property.
Most inheritance taxes in the U.S. have been replaced by state and federal estate taxes. However, some states still have an inheritance tax. Some states levy inheritance taxes instead of estate taxes, some levy both inheritance taxes and estate taxes, while others have neither. For information on whether your state has an inheritance tax, refer to our State Inheritance Tax page.
Inheriting the Proceeds of a Life Insurance Policy
If you are paid the proceeds of a life insurance policy upon the death of an insured, the benefits you receive in a lump sum payment are generally not subject to federal income tax. If you receive interest on the principal amount of the proceeds, the interest portion is subject to ordinary income tax. For example, if you choose to receive the life insurance proceeds in installment payments, the interest portion of every payment may be subject to federal income tax, although the principal portion of each payment is exempt.
If You Inherit a Retirement Account
If you inherit an IRA or employer sponsored retirement account such as a 401k or 403b plan account, it is important to understand the tax implications as well as your options. In some cases, a required minimum distribution must be taken fairly soon after you receive the inheritance and missing a deadline can be very costly. See our page on Inherited IRA's for important information about inheriting these types of assets.