How to Manage Your Inheritance Tax Wisely!
Losing a family member or close friend is always hard. In some instances, you may get a gift past the tomb in the form of inheritance. Managing an inheritance requires a well-orchestrated game plan. If you are not careful, taxes can swallow up your inheritance.
Inheritances are not categorized as income for federal levy purposes, even if you have inherited cash, property, or investments. However, any consequent proceeds from the inherited properties are taxable, excluding those that originate from a tax-free source.
You will need to add to income the interest earned from inherited money in a bank account or dividends on inherited mutual funds or stocks. Any profits obtained from selling inherited property or investments are usually taxable, but you can place claims on losses incurred on these sales.
This excerpt will shed some light on how you can handle your inheritance tax prudently.
1. Set up a Trust to Handle all the Assets
If you are anticipating an inheritance from your parents, family members, or even close friends, advise them to open up a trust to handle their assets. With a trust, you will get your inheritance without necessarily going through probate. Trusts are akin to wills, but trusts evade state probate requirements and related expenditures. A grantor can put his/her assets in a revocable trust and take them out if the need arises. An irrevocable trust mostly locks up the assets until the death of the grantor.
Trust law is usually complex, and if you don’t exercise due diligence, you can land yourself into an instant tax charge when establishing it. Seek professional guidance before opening a trust to ensure you will get things right. An independent financial advisor will come in handy during the process of establishing a trust. Additionally, this professional will help you understand your inheritance tax threshold.
2. Give Something to Charity
It may sound counterintuitive, but at times giving a share of your inheritance to charitable organizations makes lots of sense. Apart from helping the needy, you could minimize the taxable income on your inheritance since donating to charity gives you a tax deduction.
3. Reduce Distribution of Retirement Accounts
Inherited retirement properties aren’t subjected to tax unless you distribute them. Rules are available to determine when distributions must occur, mainly if the beneficiary is not the significant other. If one spouse passes on, the living spouse can inherit the IRA as his or her own. Necessary minimum distributions would start at 70 ½ years, just as it would happen with the IRA of the surviving spouse.
If you take over a retirement account from someone who is not your other half, you can move the assets to an inherited IRA bearing your name. You must start transferring the funds the year of or one year after receiving the inheritance, even though you’ve not clocked 70 ½ yet. If you’re slightly younger than your grantor, choose the “single life” way of calculating the compulsory distribution amount, depending on your age.
Taxes and expenditures could eat away the inheritance you receive. These 3 tips will help you cut back your inheritance tax significantly. Remember to seek professional counsel from a competent financial advisor before taking any action.
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