Is My Inheritance Taxable?

 The short answer is maybe?
The long answer is it depends.
The taxability of inheritance depends on the tax attributes of what is left to the beneficiaries.
Some items will pass to the beneficiaries tax free. Common items in this category are Cash, Roth IRAs and Real Estate.
Some items will pass to the beneficiaries subject to income tax as the beneficiary takes the funds. Common items in this category are Pension Plans, and Traditional IRAs & 401Ks.
Some items will pass to the beneficiaries partially subject to income tax. Common items in this category are Annuities, Pension Plans, Traditional IRAs & 401Ks.
Note that some items appear in more than one category. It is important that you consult with a CPA familiar with Estate and Inheritance issues to help you understand the taxability of your estate and/or inheritance.
There may be planning opportunities as you create your own estate plan. Also, communication with your beneficiaries is important. Beneficiaries will better understand your choices, if they are aware that the tax attributes of each item left to each beneficiary, was determined with an understanding of the tax effect on a particular beneficiary. For example, if there are multiple beneficiaries, with one in a lower tax bracket, then that beneficiary would pay less in tax on the taxable items left to that beneficiary.
Lastly, the timing of distributions to beneficiaries can provide opportunities to utilize lower tax rates by spreading out the receipt of taxable income or receiving a taxable distribution in a year that otherwise is subject to lower tax rates. Again, consulting with an experienced CPA, familiar with Estate and Inheritance issues, will help you make better decisions.
Jerald Schneider is a Certified Public Accountant providing tax, accounting and financial advice for more than 30 years. He can be reached at 661-297-1072 or by e-mail at jerald@jeraldschneider.com.