Compliments of Our Law Firm
By: The American Academy of Estate Planning Attorneys

At some point in our lives, we all dream of receiving an inheritance. We envision buying a new car, finally being able to afford private schools for the kids, or maybe even taking a trip around the world. But the reality of inheriting money or property often differs from our dreams.

For one thing, an inheritance often comes with mixed emotions. After all, the money you've received comes as a result of someones death. Often, the person who has passed away is someone who was very close to you. This means you may have a period of grief to work through before you can make any decisions concerning your inheritance.

Emotions aside, you might have reasons to disclaim the inheritance. This is the legal term for refusing money or property left to you by someone who has passed away. There are a number of reasons why you might make this choice, most of them dependent on your financial situation, including your current liabilities. When you disclaim an inheritance, it goes to the person or people it would have gone to had you passed away prior to inheriting typically, your children.

If you decide to accept the inheritance, the first thought that comes to mind might be, What about taxes? Rest assured that, in the majority of cases, an inheritance like a gift does not come with an income tax burden. So the art collection your grandmother passed down to you wont have to be reported on this years tax return. Even if you decide to sell the collection, you likely wont have a large capital gains tax bill. Instead of being taxed on the difference between the selling price and what your grandmother paid for the artwork, youll be taxed on the difference between the selling price and the value of the property at the time you inherited it. This means that youll only pay tax on the increase in value from the time of her death.

In certain special circumstances, such as when you inherit an IRA, you'll have to pay income tax on the inherited assets. An estate planning attorney can let you know if your inheritance falls under one of these special circumstances.

Finding out youre entitled to receive an inheritance and actually having the money or property in hand can be two different things. The process of settling an estate and distributing a deceased persons assets can be time consuming. There are assets to be inventoried and valued, debts to be paid, and if estate taxes are due, the process can be extended by a significant period of time. This is because the executor or trustee is required to file a federal estate tax return and pay the appropriate amount of tax from the assets of the estate. This means that some of your inheritance might need to go toward paying the tax.

The return is due nine months after the death, but, as with any tax return, an extension may be requested. The IRS typically issues a closing letter six months after the return is filed. If the executor or trustee distributes the assets of the estate without confirmation that the appropriate amount of estate tax has been paid, then he or she is personally responsible for the shortfall. Understandably, assets are not distributed until a closing letter is issued by the IRS. All things considered, particularly when estate taxes might be due, a delay of twelve or eighteen months between the time you learn of your inheritance and the time you actually receive it might not be unreasonable.

Once you have your inheritance in hand, especially if it's a large amount of money or property, it might be time to rethink your own estate plan. An estate planning attorney can help you answer all the questions that come up while you're waiting for your inheritance, and he or she can help you map out your financial future once you receive it.