Most states divide beneficiaries into different classes, depending on their family relationship to the deceased (immediate, lineal, unrelated), and set exemptions and tax rates based on those categories. Those considering bequests that could be subject to an inheritance tax might consider estate-planning strategies including gifts, insurance policies and irrevocable trusts. The best way to invest an inheritance will vary depending on individual circumstances. 1- Make a gift to your partner or spouse. Paying off high-interest debts such as credit card debt is one good use for an inheritance. Roth IRAs on the other hand are usually tax-free but you must delete the account within the next five years. Spouses are automatically exempt from inheritance taxes. However, some states have a delayed payment option. is a Maryland State Registered Tax Preparer, State Certified NotaryPublic, Certified VITA Tax Preparer, IRS Annual Filing Season Program Participant, and Tax Writer. ", Tax Policy Center. The Internal Revenue Service announced today the official estate and gift tax limits for 2019: The estate and gift tax exemption is $11.4 million per individual, up from $11.18 million in 2018. A trust can be a good way to cut the tax to be paid on your inheritance. How Does the New Tax Law Affect Your Estate Plan? Using the money to pay off your credit card bills will surely lessen your load, but it will not stop you from spending again. Spouses are exempt from inheritance taxation while children can be exempt or pay a minimal amount. Do Beneficiaries Pay Taxes If you hold on to the property for a few years and it gains in value and is now worth $9,000, according to the step-up in basis you will only be charged $1,000. There are a number of tax breaks that you can take advantage of when you inherit money. It is a good idea to invest the money you inherited from a loved one into your kids college fund. If you die within 7 years of giving a gift and there's Inheritance Tax to pay, the amount of tax due depends on when you gave it. Which US Banks Offer 5% Savings Accounts? "States With an Inheritance Tax.". How Do State Estate and Inheritance Taxes Work? The federal government does not impose an inheritance tax, but some states do. To keep these costs low, try to use an attorney who does not charge by the hour and find an executor who is willing to work for a percentage of the estate. Do Beneficiaries Have to Pay Tax on Inheritance There is no federal inheritance taxthat is, a tax on the sum of assets an individual receives from a deceased person. The step-up in the basis set the cost of your inheritance according to its current market value.