Can Inheritances Be Problematic?

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Inheritances can be complicated for heirs.

When you think of inheritances, what do you envision?


A house?

Family heirlooms?

The end to all your financial troubles?

Although inheritances can be helpful, according to a recent Canyon News article titled “Three Setbacks Associated With Receiving An Inheritance,” they can cause their own problems.

What kind of problems?

Poor planning with inheritances can cause problems.
Problems with inheritances should be solved proactively.

Family battles.

A TD Wealth survey found that some 44 percent of inheritance setbacks involve family conflicts.

These can come from improperly executed estate plans.

Without a proper plan, the assets will pass according to the laws of the state.

Even if you have created an estate plan, conflicts can arise between family members who do not understand the reasons for your actions.

If you created a trust, be sure the trustee will serve the best interests of your family.

If not, your family may be forced to take legal action against the adversarial trustee.

Any litigation, either with outside trustees or within families, can drain assets from the estate.

Poor tax planning.

If your taxes are not addressed in your estate plan, you could trigger unpleasant consequences with estate taxes, inheritance taxes, and capital gains taxes.

Although the federal estate tax exemption threshold is quite high at $11.4 million per individual, some states also levy their own estate taxes.

These state estate taxes universally have a lower threshold than the federal level.

Although there is no federal inheritance tax, some states do levy these taxes.

Usually the inheritance taxes revolve around how closely the inheritor is related to the decedent, the value of the inheritance, the state where the decedent lived, and the state where the inheritor lives.

What states levy these taxes?

Iowa, Maryland, New Jersey, Kentucky, Nebraska, and Pennsylvania all have estate taxes.

Who pays estate taxes?

The inheritor rather than the estate will pay this tax.

Typically, surviving spouses do not have to pay an estate tax on inherited assets and the amount owed is higher for those who are more distantly related.

The third potential tax consequence is the capital gains tax.

Capital gains taxes are triggered when an inherited asset is sold for profit.

These would be paid by the heir who sold the property.

For example, if an house was inherited and valued at $300,000 and later sold for $500,000, taxes would be owed on the $200,000 increase.

Impacts on Government Benefits.

If your heir is or could be eligible for certain means-tested government benefits, an outright inheritance could disqualify them.

Medicaid, Social Security Disability Insurance (SSDI), and Supplemental Social Security (SSS) have income qualification limits.

Careful planning will be required to provide an inheritance without risking the loss of government assistance.

In some cases, this may include a Special Needs Trust.

Work with an experienced estate planning attorney to protect the inheritances of your heirs.

Reference: Canyon News (October 15, 2019) “Three Setbacks Associated With Receiving An Inheritance”

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