Inheritance: The Basics

Glass jar filled with pennies sits in the hands of a child with an adult's hands cradling the child's hands over a wooden table

Inheriting assets from a lost loved one can be a very complex and nuanced situation.

Read on to learn about some of the basics of inheritance.

Types of Inheritance

There are many different types of assets you may receive in inheritance. Some examples are as follows:

  • Cash
  • A retirement plan
  • A will or revocable living trust
  • Certain types of stocks
  • Bonds
  • Automobiles
  • Jewelry
  • Art
  • Antiques
  • Real Estate

Inheritance Tax

If you inherit assets, the estate won’t likely owe estate tax to the federal government. However, Pennsylvania state law does require heirs to pay an inheritance tax to the state.

According to the Pennsylvania Department of Revenue, “Inheritance tax is imposed as a percentage of the value of a decedent’s estate transferred to beneficiaries by will, heirs by intestacy and transferees by operation of law. The tax rate varies depending on the relationship of the heir to the decedent.”

The following are the rates of Pennsylvania inheritance tax:

  • 0% on transfers to a surviving spouse or to a parent from a child 21 years or younger
  • 4.5% on transfers to direct descendants and lineal heirs
  • 12% on transfers to siblings
  • 15% on transfers to other heirs, except charitable organizations, exempt institutions and government entities exempt from tax

Property that’s owned jointly by spouses is exempt from inheritance tax.

Inheritance & Disability Benefits

If you rely on disability benefits and have recently come into an inheritance, you may have questions about whether your disability benefits will be impacted by the inheritance.

If you currently receive disability benefits, either through Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI) and receive an inheritance, your SSDI shouldn’t be impacted. This program is precisely based on needs rather than income.

However, your SSI benefits could be impacted by inheritance since it’d be seen as an additional income. Since SSI is based on financial need, a significant inheritance could lead to ineligibility for further SSI benefits.

Inheritance & Medicaid

Millions of Americans rely on Medicaid for health coverage that they might not be able to afford otherwise, particularly the following groups of people:

  • Women
  • Low-income adults
  • The elderly
  • People with disabilities

Due to Medicaid’s strict income rules, if you receive an inheritance while on Medicaid, it’s possible that you could lose your coverage.

Retirement Plan Inheritance

If you are the surviving spouse, you may take your deceased spouse’s IRA as your own IRA or as an “inherited” IRA. If you’re not the surviving spouse, but a beneficiary nonetheless, you must take the IRA as an “inherited” IRA.

The SECURE Act

The SECURE Act passed in December 2019, but the official guidance on the new rules hasn’t been released by the Internal Revenue Service (IRS) yet. However, there are a few things about it that we do know.

If the original owner of the assets passed before or during the year 2019, the SECURE Act won’t impact the funds.

Options for All

Regardless of the relationship to the original owner of the assets, everyone has the following options:

  1. “Disclaim” the inherited retirement account. If you choose not to accept the inheritance, it’ll pass to another beneficiary named in the account. This option may be helpful if you don’t need the assets and prefer to avoid the tax consequences of additional income. This option will need to be chosen within nine months of the original owner’s death before you’re allowed to take possession of the assets.
  2. Take a lump-sum distribution. You can take the assets as a lump sum without having to pay a 10% early withdrawal fee. If the assets are in a tax-deferred account, like a traditional IRA or 401(k), you’ll need to pay taxes when you withdraw these funds. You may be placed in a higher tax bracket if you use this option.
  3. Move the funds into your own IRA. This option is only available to surviving spouses and provides that the withdrawal rules are the same as if the account was always yours.
  4. Distribute portions of the assets over your life expectancy. If you don’t need the money all at once, you can move the assets into an Inherited IRA in your name. Using this option, you may take required minimum distributions (RMDs) based on your life expectancy, which allows the majority of the money more time to potentially grow tax-deferred. It’s particularly important to have a skilled professional assist you with this option because RMD miscalculations could end up costing a 50% fee for undisturbed amounts.
  5. Assets to be distributed within 10 years. This option is available to those who aren’t “eligible” designated beneficiaries. This option doesn’t demand RMDs, but you’re obligated to distribute the assets within 10 years. Assets that aren’t distributed by the conclusion of the 10th year are subject to a 50% fine.

Having a Professional on Your Side Helps

If you need assistance with an inheritance, Legacy Enhancement Trust is here to help. Our team is highly experienced in these matters and has helped many others achieve the favorable results they desired. Let our team help you with your financial goals, too. Don’t hesitate to contact our team with your case right away.

Call Legacy Enhancement Trust today at (888) 988-5503 to learn how we may assist you!

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