Receiving an inheritance from a loved one can be thrilling, but for some it may also cause some concern. In fact, there are a host of questions you may have when you receive the news that an inheritance is coming your way – including, “Does this mean that I’m going to have to pay tax on this inheritance?” Inheritance tax is different from estate taxes, which is also different from (although related to) the gift tax. Whether or not you will be required to pay an inheritance tax depends on which state you, the beneficiary, live in. Here are the answers to five common inheritance tax questions as it applies to beneficiaries that are residents of Nevada.
No. 1 – What is the inheritance tax?
An inheritance tax is a tax levied on money or property received from the estate of someone else. In those states that still impose an inheritance tax, the rate will depend usually on the type of beneficiary you are. In other words, spouses and children of the deceased are generally taxed at a much lower rate than others. In some states, certain categories of heirs are exempt from the tax completely.
No. 2 – Do I have to worry about a Nevada inheritance tax?
No! Nevada is among the majority of states that does not impose an inheritance tax. The federal government no longer levies an inheritance tax either. Beneficiaries of an estate will inherit the estate tax-free, and they receive a “step-up” in basis that can allow them to sell those assets immediately without paying capital gains tax.
No. 3 – Is inheritance tax the same as estate tax?
Basically, the difference between inheritance taxes and estate taxes is who is responsible for paying. Inheritance taxes are paid by the person receiving the money or property from someone else. Whereas, estate taxes are due from the estate of the person who has died, when the property is transferred to heirs and beneficiaries. The estate tax laws vary from state to state, and Nevada is one that does not impost an estate tax for those individuals that die as residents of Nevada or owning property in Nevada. For federal tax purposes, the federal government will only tax the deceased person’s estate if the value of the estate (including prior gifts made above the annual exclusion amount) exceeds $5.45 million in 2016.
No. 4 – What if the person giving me money is still alive?
Receiving a gift from someone who is still living is different from receiving an inheritance. You, as the beneficiary, will not be required to pay taxes on the receipt of a gift. Instead, the person making the gift is responsible for paying the applicable taxes. This is the “gift tax.” There should not be any immediate tax consequences for the gift recipient because gifts are not included as part of your taxable income. But, there may be future tax consequences if you sell the gifted property later. The recipient of the gift receives a “carry-over” basis, which means that if they later sell the gifted property they may be responsible for paying the capital gains tax.
No. 5 – Can I reject an inheritance?
You can reject an inheritance if you choose to, and, in some cases, it may be a good idea. Understand, though, that rejecting an inheritance requires more than simply telling the executor you do not want the assets you are set to receive. There are laws that govern the proper way to disclaim an inheritance. Essentially, if you need to make sure you are not considered the legal owner of the inherited property, there are specific steps that must be taken. To make matters worse, there are very strict rules about the timing required to properly disclaim an inheritance.
In order to correctly disclaim an inheritance, you need to put your disclaimer in writing and deliver it to the person in control of the estate. In most cases, that person is the executor of the estate, or trustee of the trust, that holds the property. In most cases, the disclaimer should be submitted to the executor or trustee within 9 months of the person’s death. The most important thing to remember is that you must not accept any benefit from the property if you want to actually reject the inheritance.
The importance of inheritance planning
If you believe it is in your best interest to reject an inheritance, it is very important that you discuss this decision with a Nevada estate planning attorney before you take any action. Your attorney can take whatever steps are necessary to ensure that your disclaimer is handled properly. Ultimately, receiving proper legal advice can decrease your chances of facing problems in the future. As with any estate plan, your inheritance plan should address both your present and future financial goals.
Decide how the inheritance would fit into your overall plan
If you decide to ultimately accept the inheritance, then you need to consider the nature of the assets you will be inheriting. If you are married, there are important steps that should be taken if you want to keep the inherited assets separate from the marital assets. If you need to sell an inherited asset, but you wait too long to do so, you could increase the risk of unfavorable tax consequences. Also, it is important to determine how you will handle any retirement accounts you may inherit, including planning for how you will withdraw the retirement funds. Understanding your options, while creating a plan that will protect you from potential tax consequences, is an important part of inheritance planning.
If you have questions regarding Nevada inheritance tax, estate tax, gift tax, or any other estate planning issues, please contact Anderson, Dorn & Rader, Ltd. for a consultation, either online or by calling us at (775) 823-9455.
To learn more, please download our free Nevada capital gains tax here.