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7 things you should know about how inheriting money works

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7 things you should know about how inheriting money works

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Before this read we have great information: you can get your money without waiting for the legal process to finish! Probate Advance can help you with that. they are a solid company that has helped over a thousand happy customers.

1. If you inherit a lump sum, you'll have to pay tax on it immediately

If you receive a lump-sum inheritance, the money will be hit with a federal estate tax of up to 40%, plus whatever your state's tax rate is. So if you inherit $1 million and live in a state that charges a 10% estate tax, you'll have to pay an additional $100,000 immediately. In some cases, that means you'll end up with less money than your loved one left you.

2. The taxes may not be as high as you think

Let's say you inherit a $1 million home from a deceased loved one. You don't have to pay tax on the house right away because it doesn't count as part of your taxable estate. But your inheritance is going to be counted as taxable income when you sell the house down the road. Depending on how much real estate you own, that could push your effective tax rate up to the top marginal rate of 37%. In other words, that $1 million houses could cost you nearly $370,000 in taxes -- which would be more than the value of the home itself.

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3. You may have to pay income taxes on any income your inheritance generates

Let's say your mom left you a $20,000 bond that pays 1% interest a year for 20 years. You don't have to pay tax on the full $20,000 at once. But if you sell the bond after five years and pocket the cash, it will be taxed as ordinary income. And if you sell the bond after seven years and invest the proceeds in stocks, it will be taxed at capital gains rates (which are typically higher than income tax rates).

4. Giving your inheritance away now could save on estate taxes later

If you want to give most or all of your inheritance away without paying tax now, there are some ways around it. One is to donate appreciated stock to charity. The donation can be worth tens of thousands of dollars without triggering gift tax -- and you can deduct the full value of the gift on your tax return. Another option is to leave all or most of your money to charity in your will.

5. If you inherit an IRA, it could cost you big time

You inherit an IRA worth $1 million. You can withdraw $4,000 each year without penalty -- but with the earnings taxed as ordinary income, that's over $80,000 in federal taxes alone. And depending on how old you are when you inherit the account, you might have to take the required minimum distributions every year after age 70 1/2 or pay an excise tax for not doing so. So if you're under 60 and inherit an IRA, it could easily cost you more than $200,000 over 30 years. And if you're over 70 1/2 but under 80, withdrawals could cost even more because they'll be hit with both income taxes and an early withdrawal penalty.

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3. You may have to pay income taxes on any income your inheritance generates

Let's say your mom left you a $20,000 bond that pays 1% interest a year for 20 years. You don't have to pay tax on the full $20,000 at once. But if you sell the bond after five years and pocket the cash, it will be taxed as ordinary income. And if you sell the bond after seven years and invest the proceeds in stocks, it will be taxed at capital gains rates (which are typically higher than income tax rates).

4. Giving your inheritance away now could save on estate taxes later

If you want to give most or all of your inheritance away without paying tax now, there are some ways around it. One is to donate appreciated stock to charity. The donation can be worth tens of thousands of dollars without triggering gift tax -- and you can deduct the full value of the gift on your tax return. Another option is to leave all or most of your money to charity in your will.

5. If you inherit an IRA, it could cost you big time

You inherit an IRA worth $1 million. You can withdraw $4,000 each year without penalty -- but with the earnings taxed as ordinary income, that's over $80,000 in federal taxes alone. And depending on how old you are when you inherit the account, you might have to take the required minimum distributions every year after age 70 1/2 or pay an excise tax for not doing so. So if you're under 60 and inherit an IRA, it could easily cost you more than $200,000 over 30 years. And if you're over 70 1/2 but under 80, withdrawals could cost even more because they'll be hit with both income taxes and an early withdrawal penalty.

6. Your inheritance could make it harder to qualify for some government benefits

Some government programs base eligibility on how much money is in your bank account -- not just how much money comes out of it due to withdrawals or other expenses. That means assets that don't normally show up on your balance sheet -- like inherited IRAs or real estate -- count against your total wealth when determining whether you're eligible for certain programs. For example, Medicaid requires most people to spend down their assets below $2,250 before they can qualify for coverage of nursing home care. So if you inherit an IRA worth $1 million and withdraw $25,000 for living expenses each year, Medicaid won't count your savings as an asset after two years -- leaving only the remaining $975,000 of real estate on your eligibility chart. Of course, this isn't always the case -- but it's something to be aware of.

7. You could lose out on some financial protections

The rules for protecting yourself from debt collectors are different depending on whether your debt is "secured" or "unsecured." Unsecured debts include credit card balances and personal loans -- and if you inherit someone's unsecured debt and don't pay it off within a certain period, it could wind up being charged off and sold to a collection agency. Secured debts include mortgages and auto loans -- and because creditors know they can repossess assets like houses and cars if they don't get paid back, they typically don't sell them off when the borrower stops making payments. But when someone dies with $10,000 in credit card debt and no assets to sell off, unsecured lenders may charge off the balance and collect from heirs -- who won't be able to claim bankruptcy protection like the debtor would have been able to do. Of course, this doesn't apply in every case -- but it's something to be aware of nonetheless.