SHOW NOTES: 2019-12-12 MiM

Listen to Show Audio

Last Week’s Question of the Week: According to the National Christmas Tree Association, how many Christmas trees were sold in the United States in 2018? Was it 20 million or over 30 million trees?

ANSWER: It was over 30 million. Actually, 32.8 million live trees were sold with a price tag of over $2 billion!

HOST: Today your topic revolves around inheriting money and the implications of it. What do we need to understand if and when this may apply to us?

KLAAS FINANCIAL: What we are referring to is to what has been dubbed as “the great wealth transfer” that will be occurring over the next 20 years. The youngest baby boomers are now 55 years old and the oldest are 73. In 2016, there were roughly 74 million boomers, according to the U.S. Census Bureau. It is estimated that by 2030 it is estimated that as much as $59 trillion+ will be passed on from baby boomers.

So how is that likely to affect you? How much money are we talking? According to Federal Reserve research conducted in 2013, the average inheritance for the wealthiest 5 percent of U.S. households was $1.1 million, while the bottom 50 percent received just $68,000 and the middle 45 percent received $183,000. With that said it is important to understand how inherited money should be treated, and how it will be taxed should you be the recipient.

What is interesting here is that with longevity, sometimes these transfers are occurring from parents who are in their 80s and 90s to their children who are in their 60s and 70s. Your needs for the money will likely have changed, and your own estate planning may need to be revised.

HOST: If I inherit money, will I have to have to pay taxes on that money?

KLAAS FINANCIAL: This is always the first question we hear. Generally, no. You may be pleasantly surprised to know that inheriting money from a friend or family member will not cost you a single dollar in federal income tax.

Instead, the U.S. tax system may impose a tax on the decedent’s estate—which is the source of your inheritance money—if its value exceeds a certain amount. However, the value of the estate in 2019 would have to exceed $11.4 million, or $11.58 million per individual in 2020 for their estate to have federal taxes imposed.

Inheritances are not considered income for federal tax purposes, whether you inherit cash or life insurance or investments or property.  Any subsequent earnings on the inherited assets are taxable, however, unless it comes from a tax-free source. You will have to include in income the interest income from inherited cash in a bank account, for example, or dividends on inherited stocks or mutual funds. And if you inherit property or assets that generate income that income is typically taxable to you.
Any gains when you sell inherited investments or property are generally taxable, but you can usually also claim losses on these sales.

Although the federal government doesn’t have an inheritance tax, State taxes on inheritances vary; check your state’s department of revenue, treasury or taxation for details, or contact a tax professional. As of 2019, The only U.S. states that collect an inheritance tax are Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Each has its own laws dictating who is exempt from the estate tax.
INCOME TAXES: If you inherit certain retirement accounts, you will likely have to pay income taxes on distributions from inherited 401(k)s and IRAs, as you take distributions as the beneficiary. Remember, the person from whom you are inheriting this money from has never paid taxes on those earnings, and regardless who takes it out, somebody will almost always be paying income tax on it at some point.
And if you inherit property or assets that generate income or interest, that income or interest is typically taxable to you when you after possession of the bequest.

HOST: What are the most important things to do if I inherit money?

KLAAS FINANCIAL: Go slow. In most cases you don’t have to make any major decisions right away and allowing yourself to grieve is more important.

Seek out professionals to guide you. Your CPA, your financial advisor, or an estate planning attorney. They will guide you and help you understand what is actually in front of you and how best to deal with it in a methodical fashion.

Treat the inheritance as if it were your own money to start with. Remember that receiving an inheritance from someone should be a blessing, so properly managing how it can help you perhaps shore up your own debt, your own savings, or your future retirement vs. creating negative spending habits is very important from the beginning.

HOST: If I inherit a 401k or an IRA what do I need to do?

KLAAS FINANCIAL: Likely you will need to open up a Beneficary/Inherited IRA so that the money can be transferred into the new account to preserve its tax deferred status. Remember that any money in this type of account has never been taxed, therefore as the money comes out, you will have to pay income tax on it according to your own tax bracket. Depending on who you inherited the money from (spouse vs. non-spouse), your age, their age etc. you may have to begin the distribution of required minimum distributions. There are also Roth IRAs that you may inherit that will not create taxes as you withdraw it, but you will be required to take annual required distributions.

Listen to Show Audio

Catch C.J. Klaas and Maleeah Cuevas on Money in Motion every Thursday on Madison's 1310 WIBA from 8:05-8:35am.