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7 Questions You Must Ask Your Financial Advisor About Taxes on Inheritance

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Inheritance includes the transfer of assets to the legal heir on the demise of the estate owner. These assets may consist of cash, investments, jewelry, and real estate, amongst others. The value of inheritance varies from person to person. It may either be a few thousand dollars or millions of dollars. Regardless of the estate’s value, inherited assets are subject to taxation. Hence, you are liable to pay inheritance tax on such assets. To comprehend the concept of inheritance tax, you may want to consult your financial advisor. However, it is important to ask the right set of questions to garner relevant information.

To make this easy, here is a list of seven important questions to ask your financial advisor about taxes on inheritance.

  1. What are inheritance taxes?
  2. Inheritance tax is a state tax that becomes payable on the receipt of assets from the estate of the deceased. Unlike federal estate taxation, the responsibility of paying taxes is on the beneficiary of the assets and not the estate owner. The state takes into account the size of the assets rather than the whole estate. The tax is, thus, payable on the respective assets received and not the entire estate.

    As of 2020, 6 American states impose inheritance taxes. These are Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

  3. Are inheritance taxes and estate taxes the same?
  4. The assets of the deceased are subject to inheritance and estate taxes. These taxes are commonly referred to as death taxes. However, there is a difference between the two.



    Inheritance tax

    Estate tax

    Who is the imposing authority?

    The state authorities levy these taxes.

    The federal government or the tax authorities of the state impose these taxes.

    Who is liable to pay the tax?

    The taxes are payable by the beneficiary. 

    Tax payment is the liability of the estate.

    What is the base value for taxation?

    The value of the inherited asset forms the base of tax calculation.

    Taxation is based on the value of the entire estate.

    What is the taxation rate?

    Tax is calculated on the value of the asset, over and above the exempted limit at varying rates. The tax rates differ according to the nature of the relationship shared with the deceased.

    Tax is imposed on the estate value, over and above the exempted threshold at a single rate.


  5. What is the rate of taxation?
  6. The asset value and the relationship with the deceased play vital roles in determining the amount of inheritance tax. The spouse is exempted from taxation, and the rates gradually increase with distant relatives. Hence, the tax rates are higher in the case of distant family members and non-relatives. However, the tax rates and rules vary from state to state. Besides, the exemption thresholds also differ. Moreover, some states keep direct descendants outside the purview of taxation.

  7. How are inheritance taxes calculated?
  8. Many people generally assign an executor for their estate. The executor is responsible for distributing the assets amongst the designated beneficiaries. After the asset distribution, the tax amount is calculated separately for each beneficiary. The beneficiary must submit these details through the inheritance tax form. The amount of tax is calculated at the applicable rate, over and above the threshold limit. For example, assuming exempted limits of $25,000 and a tax rate of 11%, the tax amount for inherited assets worth $40,000 will be:


    Amount in USD

    Asset value


    Threshold exemption


    Taxable value


    Tax amount (11% on taxable value)


  9. Are all inherited assets subject to tax?
  10. Life insurance to a named beneficiary is normally not taxable. Besides, all states do not levy inheritance taxes. The decedent’s state of residence and the location of the asset play a vital role in determining the tax applicability. For instance, Mr. A lives in New Jersey. His uncle lived in New York and left him 50,000 USD by way of a will. In this case, Mr. A is not required to pay any inheritance tax though the same is applicable in New Jersey. But, if Mr. A’s uncle was residing in New Jersey, Mr. A would have been liable to pay the tax, irrespective of his place of residence.

  11. What if inheritance taxes are not paid?
  12. Receipt of inherited assets has tax-filing requirements. You must keep aside some funds to meet the tax obligation. An appreciation in the value of assets is subject to capital gains tax. In the case of an inherited retirement account, the distributions require a payment of income tax. Failure to pay the tax or delayed payments attract penalties and interest. Hence, you must ensure timely payment of inheritance taxes as per applicable rates and regulations.

  13. Is there a way to reduce inheritance taxes?
  14. You cannot do much to plan or reduce your inheritance taxes. It primarily depends on how the benefactors have planned their estate. Besides, their decisions cannot be changed and are held after their demise. Hence, there are not many strategies that can bring relief in the tax burden. But, you can talk to your relatives or close friends who may leave behind their assets to you. This way, you can get an understanding of their plans and anticipate your tax liability. Besides, you can urge them to meet a financial advisor for planning their estate efficiently. The benefactor can make use of strategies like gifting or making charitable contributions to reduce the tax in the hands of the heirs.

To sum it up

Inheritance tax is not a federal government tax, and only a few states levy it. As it is a state tax, the rules differ for each state. Hence, it is important to consult your financial advisor to understand the applicability of relevant laws and tax rates on your inheritance. Moreover, an efficient estate plan can reduce the tax burden on the heir. This can reduce the tax liabilities of your beneficiaries.

It may be beneficial to consult a financial advisor about estate planning to know more about inheritance and estate taxes.

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The blog articles on this website are provided for general educational and informational purposes only, and no content included is intended to be used as financial or legal advice.
A professional financial advisor should be consulted prior to making any investment decisions. Each person's financial situation is unique, and your advisor would be able to provide you with the financial information and advice related to your financial situation.