Income Tax on Inheritance: How To Reduce It
Income Tax on Inheritance
What is Inheritance Tax?
Any taxes which occur as the result of a person passing away are typically referred to as “Inheritance Taxes.” They are also called Death or Estate Taxes as they are usually levied on the total value of the deceased person’s money and property, in other words, their estate. However, there are differences between estate taxes and tax on inheritance where international tax laws are concerned.
Estate taxes usually apply to those individuals or the deceased’s representatives that have inherited the estate proceeds of that deceased individual, whereas the income tax on inheritance is levied on the estate’s beneficiaries. However, the distinction between the two where international tax law is concerned is oftentimes vague. For instance, in the UK, the personal representatives of the estate have to pay inheritance taxes when in fact this is actually an estate tax.
Steps to reducing income tax on inheritance
There are basically 5 steps to reducing your income tax on inheritance and we have listed the information here in the hopes that it helps you in this area:
Step #1: Start “gifting” your children now – you can give your children up to $13,000 annually (£3,000 in the UK). Cash gifts given annually to your children in small amounts will help to reduce your tax liability.
Step #2: You (and your spouse, if there is one) need to make a plan – if there are more assets and you will exceed the IRS’ inheritance tax limits, consider gifting some to your spouse if her assets put here beneath those limits.
Step #3: If you have not set up an irrevocable trust with your life insurance company, you should consider doing so immediately – be sure to name your children as the beneficiaries on your policy when you set it up. The proceeds of the trust will not be subject to tax when you die.
Step #4: Help your children with their education expenses – normally, gifts in the form of education expenses (in the US) will not be taxed so long as the money goes directly to the college or university.
Step #5: Consider setting up a QTIP Trust – these will allow you to bequeath any assets to your spouse when you die, should there still be assets left in your estate at that point in time. However, make sure that you still name your children as beneficiaries. If your spouse dies first, those assets may count towards their limit on the inheritance tax so the above may not apply.
© Income Tax on Inheritance
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