When you receive money from a deceased parent's estate, part of the money you receive may be taxable. Depending on where you live, you may have to pay taxes on your inheritance. In some cases, the amount you receive will be impacted by estate taxes imposed before you receive it.
Estate Tax Rules
When an individual passes away, his estate will be subject to estate taxes. The total value of his property is added up to determine whether his estate will be charged estate taxes. As of the time of publication, any estate that is below $5 million when the owner dies is not subject to estate taxes. If your parent's estate is worth more than $5 million, part of your inheritance will be taken before it is distributed to you.
Inheritance Tax Basics
When you receive money from a deceased parent, you may have to pay inheritance taxes on the amount. The federal government does not impose any inheritance taxes, but some states do. If you live in one of the states that impose this tax on those who inherit property, you have to pay taxes on the amount you get. This tax is based on the total amount you received, and you will be taxed on it at your marginal tax rate.
Inheritance From a Trust
In some cases, your parent will have taken the time to set up a trust for your benefit. When you receive money from a trust, the same inheritance tax laws apply. However, some trusts can minimize or avoid the amount of estate taxes that will cut into your inheritance. For example, with an irrevocable trust, the assets in the trust do not count toward the estate tax limit. This may help your parent's estate get under the estate tax exemption limit.
If you live in a state that imposes an inheritance tax and you also inherit property, you may have to use the cash you receive to pay the taxes on the property. For example, if you inherit a house or other personal property, you have to pay inheritance taxes based on the value of that property. In some cases, those who inherit real estate end up selling it just to pay the inheritance taxes on it.