Budgeting What Is an Inheritance? Inheritances explained in less than five minutes By Cassidy Horton Updated on December 30, 2021 Reviewed by Charlene Rhinehart Fact checked by Gina LaGuardia Fact checked by Gina LaGuardia Gina LaGuardia has more than 25 years of experience in senior editorial roles, and is an expert in personal finance topics, including banking and lending. She has created content for financial powerhouses such as Chase Bank, American Express Canada, First Horizon Bank, BBVA, and SoFi. learn about our editorial policies In This Article View All In This Article Definition of Inheritance How an Inheritance Works Inheritance Tax Ways to Avoid an Inheritance Tax Inheritance Tax vs. Estate Tax Unclaimed Inheritances Photo: Morsa Images / Getty Images Definition Your inheritance is the property you receive from someone upon their death. Key Takeaways An inheritance is property you receive from someone who dies.An inheritance can include money, life insurance policies, investment portfolios, retirement accounts, real estate, jewelry, fine art, and other assets.You may be subject to inheritance taxes that depend on your state laws, your relationship to the deceased, and the size of your inheritance. Definition and Examples of Inheritance An inheritance refers to any assets a person leaves to someone else after they die. It could include property such as cash, investment accounts, retirement accounts, real estate, life insurance policies, jewelry, cars, and other valuables. Note When you receive an inheritance, you are considered the beneficiary. Someone can name more than one person to be a beneficiary of their property after they die. For example, your mother may leave you her house, life insurance proceeds, and bank accounts to you as your inheritance in her will. She may leave her investment accounts and jewelry to your sibling, so that property would be their inheritance. How an Inheritance Works How an inheritance works depends on how assets are designated to be transferred. There are a few ways this can occur, including outside of probate, via a living trust, for example, or through probate. If there's a will (and no living trust), it’s submitted to probate to start the distribution process. The probate court begins this process by authenticating the last will and testament and appointing the executor of the estate. The executor pays any debts and taxes owed by the deceased before distributing the remaining assets to their rightful beneficiaries. If a person dies without a valid will, or “died intestate,” their assets still go through the probate process. Their assets are divided up based on the state’s “intestate succession” laws instead of the deceased’s wishes. In most cases, assets go to their closest relatives. Note Assets that are jointly owned, have a designated beneficiary, or are held in trust may not have to pass through probate, even if the deceased person did not have a will. For example, bank accounts with a payable-on-death beneficiary and life insurance policies with a named beneficiary pass directly to the recipient. Jointly-owned assets also go directly to the surviving co-owner. What You Should Know About Inheritance Tax If you receive an inheritance, you should be aware of the tax laws that will apply. You could potentially pay various taxes on an inheritance, such a state inheritance tax. Six U.S. states have an inheritance tax: IowaKentuckyMarylandNebraskaNew JerseyPennsylvania Surviving spouses are always exempt from inheritance taxes. In some states, children may also be exempt or face a lower tax rate. Beyond that, the amount of inheritance tax you pay depends on your relationship with the deceased and the state laws. Generally, the closer in relation you are to the deceased, the lower your tax rate. For example, in Kentucky, you’re exempt from all inheritance taxes if you’re a surviving spouse, parent, child, grandchild, brother, or sister. You pay a 4%-16% inheritance tax (with a $1,000 exemption) if you’re a niece, nephew, aunt, uncle, great-grandchild, daughter-in-law, or son-in-law. All other people and organizations pay a 6%-16% tax (with a $500 exemption). In this example, the tax rate increases along with the size of the inheritance. Ways to Avoid an Inheritance Tax Through proper estate planning, you can avoid or minimize the amount of taxes your beneficiaries have to pay. Three common strategies used to minimize taxes include: Life insurance proceeds: Life insurance proceeds aren’t generally taxable as income to your beneficiaries. Irrevocable trusts: Some types of irrevocable living trusts help you avoid or reduce taxes because the property transferred into them doesn’t count toward your estate value. Gift tax exclusion: If you know your estate will be rather large when you die, you can minimize your future tax burden now through the gift tax exclusion. This rule allows you to give up to $15,000 a year to an individual, tax-free as of 2021. If you’re married, you and your spouse can give up to $30,000 per year to one person. Inheritance Tax vs. Estate Tax The main difference between an inheritance tax and an estate tax is who pays it. An inheritance tax is paid by the beneficiary receiving it. Estate taxes are paid out by the estate before assets are distributed to beneficiaries. There’s technically no federal inheritance tax, but there is a federal estate tax that applies to estates in excess of $11.7 million as of 2021 and $12.06 million in 2022. Surviving spouses are usually exempt from both inheritances and estate taxes. This chart highlights more differences between the two: Inheritance Tax Estate Tax Paid by the person who receives the inheritance Paid by the estate’s executor before assets are distributed to beneficiaries Spouses are usually exempt. Children and other direct relatives may be exempt, too, depending on state law. Spouses are usually exempt. No federal tax Federal tax applies to estates of $11.7 million or more as of 2021 ($12.06 million for 2022) Six states with an inheritance tax: Iowa Kentucky Maryland Nebraska New Jersey Pennsylvania 12 states (and The District of Columbia) with an estate tax: Connecticut District of Columbia Hawaii Illinois Maine Maryland Massachusetts Minnesota New York Oregon Rhode Island Vermont Washington Delaware, Kansas, New Jersey, North Carolina, Ohio, Oklahoma, and Tennessee used to have estate taxes, but they were repealed. How to Find Out if You Have an Unclaimed Inheritance You can find out if you have an unclaimed inheritance by visiting Unclaimed.org or MissingMoney.com. Both websites are endorsed by the National Association of Unclaimed Property Administrators (NAUPA) and allow you to search for unclaimed assets in your state. If you suspect you may have an inheritance from someone who’s recently died, you also can contact the executor of their estate to verify. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Federal Trade Commission. "Debts and Deceased Relatives." Accessed Nov. 5, 2021. Tax Policy Center. "Briefing Book." Accessed Nov. 5, 2021. Kentucky Department of Revenue. "A Guide to Kentucky Inheritance and Estate Taxes," Page 6. Accessed Nov. 5, 2021. Internal Revenue Service. "Frequently Asked Questions on Gift Taxes." Accessed Nov. 5, 2021. Related Articles What to Know About Inheriting a Home What Happens to Your Parent's Finances When They Die? What Is a Decedent? Steps To Creating a Good Estate Plan What Happens When a CD Owner Dies? Who Pays a Deceased Person’s Bills? Are Estate Planning Fees Tax-Deductible? Estate Planning Questions To Ask Does a Will Always Have To Be Probated? What Happens if You Die Without a Will? Why Is Estate Planning Important? How To Set Up a Living Trust Handling Inheritance Issues With Siblings How To Avoid Probate What Is an Estate Plan? What Does Liquidity Refer to in a Life Insurance Policy? Newsletter Sign Up By clicking “Accept All Cookies”, you agree to the storing of cookies on your device to enhance site navigation, analyze site usage, and assist in our marketing efforts. Cookies Settings Accept All Cookies