Does the Recipient Have to Pay Inheritance Tax If You Have a Transfer on Death?

By Regan Rondinelli-Haberek

When an individual passes away, those responsible for settling his estate are often faced with federal and state taxes. There may be estate taxes or income taxes, as well as inheritance taxes. Each tax is imposed for different reasons and may affect a particular estate. Depending on the state in which you live, if you receive property from a deceased individual through a transfer on death account, you may be responsible for an inheritance tax.

Paying Inheritance Tax

An inheritance tax is a tax imposed on a beneficiary when she receives property from a deceased individual. The inheritance tax should not be confused with an estate tax. An estate tax is levied, by the federal government and some states, on an estate whose gross value exceeds a certain amount. An inheritance tax is imposed on the beneficiary who receives property from an estate. There is no federal inheritance tax, and some states, such as New York, don't impose such a tax. Those states that have an inheritance tax differ on the rate of the tax, and on whom the tax is imposed. For instance, in Kentucky, the amount of the tax depends on the value of the property and the relationship of the recipient to the deceased. Often, the deceased might have made provisions in his will that the estate should be responsible for any inheritance tax, rather than the tax passing to the beneficiary.

Avoiding Probate

Many individuals use the transfer on death, or TOD, to pass financial accounts outside of probate. Probate can be a costly and lengthy process that many individuals seek to avoid. While TOD designations are useful for avoiding probate, they do not avoid taxes. If your state has an inheritance tax, and you are the beneficiary of a TOD account, you will likely be responsible for an inheritance tax. However, you may not be responsible for the tax in some cases or you may taxed at a lower rate by virtue of your relationship to the decedent. For instance, in Pennsylvania, the surviving spouse and children under the age of 21 pay no inheritance tax on property received from a deceased spouse or parent. Since inheritance tax laws are state specific, consult an attorney for information on the law in your state.

Protect your loved ones. Start My Estate Plan
Protect your loved ones. Start My Estate Plan
How to Will Your Home to a Relative So They Don't Pay Inheritance Tax

References

Related articles

Inheritance Laws in Kentucky

Inheritance laws in Kentucky depend on whether or not the deceased person, known as the decedent, has written a will. If he has made a valid will, his estate passes to his chosen beneficiaries in accordance with his wishes. However, if he did not make a will, his estate will be distributed in accordance with state law. This is known as intestate succession. Additionally, Kentucky requires certain beneficiaries to pay tax on bequests over a certain value.

How to Create a Special Needs Trust With an Inheritance

Parents and other loved ones often have the best intentions when they leave an inheritance to a family member who has disabilities or who has been determined to be disabled by the Social Security Administration. However, this inheritance may do more harm than good because it can interfere with receiving government benefits, such as Supplemental Security Income (SSI) and Medicaid. Drafting an effective special needs trust can be challenging, and a mistake can have serious consequences. It is best to consult an experienced estate planning attorney when considering a special needs trust.

Indiana Law for Filing Taxes for a Deceased Person

The old adage about the inevitability of death and taxes applies in Indiana just as it does in other states. If an income-earning resident of the state dies, he still may have a tax liability which the state will assess against his estate. A representative of the deceased must file a tax return on the decedent's behalf in accordance with state law; the forms, rules and income tax rates remain the same.

LegalZoom. Legal help is here. Start Here. Wills. Trusts. Attorney help.

Related articles

Laws on Receiving an Inheritance

The general principle of inheritance law is that the maker of a will, known as the testator, is entitled to distribute ...

Distributing Assets of the Deceased

Probate is the legal process of administering the estate of a deceased person, known as the decedent, by resolving all ...

Laws Concerning Inheriting Money From Overseas

If you expect an inheritance from outside the United States, it's a good idea to familiarize yourself with the laws ...

Can I Refuse to Accept an IRA if I Am Designated as the Beneficiary?

Under normal circumstances, beneficiaries are more than eager to collect their inheritance. In some circumstances, ...

Browse by category
Ready to Begin? GET STARTED