You have worked hard to accumulate your property and cash and you may decide you want to have some control over how it is dispersed after you are gone. Leaving your assets to friends and family can be a wonderful gift, but in some cases, the benefactors of your generosity could end up paying inheritance income taxes on their gifts. There are several things you can do to help them avoid an income tax burden after you are gone.
Check state laws. Not all states require an inheritance tax levy. As of 2010, 10 states require your heirs to pay inheritance tax on property that is left by you: New Jersey, Connecticut, Kansas, Maryland, Tennessee, Oregon, Iowa, Nebraska, Pennsylvania and Kentucky.
Add beneficiary names to the property. If you know whom you want to leave the property to, adding their names to the property deed before your passing will insure that they avoid paying inheritance tax later. As co-owners of the property, they simply become remaining owners. This decision must be carefully considered because once you add someone as a co-owner of the property, they have rights to it even though you are not gone. For example, if you name your brother as co-owner of your home, he can move in now if he decides that's what he wants to do.
Add names to vehicle registrations. If you plan to leave a vehicle or motor home to someone, putting her name on the title and registration now takes the automobile out of your estate when you die, and she enjoys the right of joint owner survivorship. This means she gets the vehicle and does not owe inheritance tax. The same caution from the home ownership needs to apply here. If you name a person as co-owner of your car or motor home, you could come out to an empty driveway. Naming someone as a joint owner of the vehicle typically gives them rights to the vehicle.
Designate a contingent owner to your bank accounts. Your bank has forms that you can file now, on which you name whom you want to be the new owner of your bank account upon your death. This provides that person access to your funds without having to pay an inheritance tax. The person you name will not be able to access your funds or information about your assets in the account until after you have passed.
Set up a trust. This protects all property that does not fall under joint survivorship and co-ownership from inheritance tax. You will need to name whom you wish to execute the trust after you are gone and how you would like it executed. Though it is possible to put your money in trust and then in turn live off of the funds, it is not cost effective. Trustees and executors generally get paid for their services. It is better to only put into trust the money you wish to leave to beneficiaries after you die. The money you use for other purposes should remain separate.
- Take time once a year to re-evaluate all of your trusts, co-ownerships and bank documents to be sure you still wish to have them set up the way they are set up. If you pass without changing them, your loved ones could end up not getting the property you wanted to leave them.
- Jupiterimages/Photos.com/Getty Images
- What Happens to Bank Accounts When Someone Dies?
- How to Invest Inheritances
- How to Relinquish an Inheritance as a Beneficiary
- Is an Inherited House Taxable Income?
- Depreciation of Inherited Property
- Minnesota Inheritance Tax Law
- What Is the Difference Between Irrevocable & Revocable Trust?
- How to Avoid Inheritance Taxes on Property
- How to Start Retirement After a Windfall Inheritance
- How to Change a Deed When You Inherit Property