Estates 101: Inheritance

All right.  You’ve sold all the assets the estate is going to sell and you’re ready to close this chapter of your life, at least legally and financially.  You have to settle the accounts.

The optimistic ending.  So in theory, at this point, you take all the money the estate has.  You pay off all remaining debts.  (And remember, money you paid out of your own money to feed the estate’s coffers during this period is a debt the estate owes you — not inheritance!)

Ideally, after paying the debts, the estate still contains a non-negative amount of money (even zero).  If that’s the case, the heir gets everything that’s left.

I’m not getting into how multiple heirs divvy things up if there’s any non-monetary assets left.  That could be complicated if they can’t come to an agreement in accordance with either the will (if the person had one) or state laws regarding division of estates (if the person was intestate).  I was my mom’s only heir, so I didn’t have to learn much on this point, and I don’t want to steer anyone wrong.

The heir’s inheritance and tax.  Remember that your inheritance is more than just what you get out of the estate.  Some other money, like the value of my inherited IRA and half the money in the joint bank accounts, is not estate but it is inheritance.

Once an heir has the total value of their inheritance, calculating the tax they pay on it is pretty straightforward.  In PA, the tax is 4.5% for a direct descendant heir, 12% for a sibling, and 15% for anyone else.  (Certain types of “anyone else”, like charities, are exempt, but if you’re leaving something to Cousin Bobby or your best friend Billy, it’s going to be 15% in PA.)  Other states have other rates.

Federal inheritance tax? There is theoretically a federal estate tax, but given that it doesn’t apply unless the inheritance is somewhere over five million dollars, either you can forget about it entirely, or you can probably afford a lawyer to help you deal with it.  (And my inheritance is most definitely in the “forget about it” category.)

Closing up (the optimistic ending).  Once all those numbers are sorted out, you talk to your lawyer and receive your inheritance, minus the inheritance tax.

But what if the estate’s bottom line ends up below zero?  That’s the next article.  Hold on tight and hope you don’t get there.

Disclaimer: I AM NOT A LAWYER.  NONE OF WHAT I SAY HERE SHOULD BE CONSTRUED AS LEGAL ADVICE.  A LICENSED LAWYER SHOULD BE CONSULTED ON ALL LEGAL MATTERS PERTAINING TO ESTATES. The purpose of this article is to tell you some things I learned in the process of dealing with my mom’s estate, which you may want to think about in planning your own estate or dealing with a loved one’s estate.  Furthermore, details of some of these matters differ from state to state, so if you’re not in Pennsylvania, things may be different.  Consult your lawyer on all matters.