When a loved one dies, the last thing you probably want to think about is money. But the truth of the matter is that money will take up a large amount of your time if you’re named in the will of a loved one. Inheritance isn’t simple, and to make matters worse, it’s probably not something you’re experienced with. Here’s a broad overview of the issues you’ll face when a relative, friend or even an acquaintance leaves you an inheritance.
Which laws apply
Generally speaking, the state where the decedent was domiciled prior to their death will govern the administration of the estate. For most people, it will be a simple matter of dealing with the state court where the relative lived prior to their death. But for some estates where the decedent owned real property in a number of jurisdictions, figuring out which laws apply can be a little more complicated. Often testators (those writing wills) will choose which state’s laws will apply, but to do so legally, they must have a real connection to the state.Probate
Probate is the legal procedure used for settling an estate, paying off debts and taxes, and transferring ownership. Assuming there’s no dispute, probate can best be described as a cumbersome, time-consuming process. Simply put, there’s a lot of paper work involved. Often, testators will try and spare their loved ones from having to deal with probate, but if the testator insists on owning an asset, such as a house, up until they die, there’s really no way around a probate.Non-probate assets
Some assets like trusts, bank accounts and insurance policies can be transferred without probate. Typically, these are the first assets an inheritor will deal with because they are the easiest to transfer. Take the example of a bank account. First, you must determine that there is a bank account; often you’ll do this by going through the decedent’s personal papers. From there, you’ll know which banks to contact. The relevant banks will then tell you what needs to be presented to them in order to gain control of the account, usually proof of death and ID for yourself. From there, the bank account can be transferred to your name, provided that the decedent listed you as the payee upon death.Litigation
Let’s face it: people can and do contest estates. Specifically, people can litigate wills and seek to invalidate trusts. If this happens to you, it’s important to find an attorney to represent your interests, because the estate lawyer will work on behalf of the estate. Contesting estates is yet another part of the probate process.Disclaiming the inheritance
It sounds odd, but you may not always want to accept an inheritance, and the law gives you a right to refuse. During the probate process, you can essentially walk away by disclaiming the estate. While not common, you might want to refuse if the gift will cost you money. That can happen when there’s a tax lien on real property you inherit or when the estate has debts that outweigh its total value.Taxes on the estate
The estate tax is levied against the estate, not the inheritor. The IRS uses Form 706 to handle the estate tax, which is levied against estates in excess of $2 million. But that number continues to rise, and the tax itself could be phased out eventually.The U.S. does not have an inheritance tax, but several states do, so you’ll have to check your local state laws.
One excise you won’t be able to avoid is the income tax. An inheritor handles income tax as he would any other year, but in all likelihood, there should be more to report when a loved one provides for you in their estate. It’s a good idea to consult with a tax professional to minimize your tax liability in this case.
How long it will take
Sadly, there’s no standard time frame for handling inheritances, because each estate is different. States like California say probate should be completed within 18 months of death, but that’s assuming there’s no dispute over the will. If there is a dispute, plan on dealing with the inheritance for several years. But no matter what the case is, don’t make plans based on getting the money at a certain time. You are dealing with the state’s schedule, not your own.In cases involving divorce
Don’t kid yourself, divorce can add a serious wrinkle to an inheritance. Assume the money is left to you and you alone, can your ex force you to share it? Well, the answer depends, and it depends mostly on what state you live in. States like Illinois say "No," but in state’s like California, you could end up giving away half of your inheritance if you don’t keep it as separate from your marital property. As always, when it comes to divorce, the best advice is to talk to your lawyer when you get news of an inheritance.Taxes on selling inherited property
Down the road, you may choose to sell property you’ve inherited. If you sell property, you are subject to taxation as always. But when you sell property you inherited, the question becomes, “What was the value of the property when you acquired it?” There are two points to measure from, the value when the deceased acquired the property or the stepped-up basis, which is what the property was worth at death. Under current law, the basis is the value of the property when the testator dies. The stepped-up basis allows you to save at tax time because you bring the value up from the testator’s original purchase price for the property. But in 2010, when the estate tax is scheduled to disappear, things get a little more complicated. Under the new rule, you’ll be able to take a stepped-up basis on only $1.3 million. After that, your basis will be either the former owner’s basis or the date-of-death market value, whichever is smaller.inheriting peace of mind
Settling an estate isn’t an easy matter, but it is something you can handle. While it may seem like a daunting task, the truth of the matter is that most of your time will be spent gathering documents, filling out forms and waiting -- but that’s not such a bad thing. Ultimately, it would be nice to have immediate closure on the death of a loved one, but reality makes it important to proceed with caution when settling an estate and disbursing large sums of money and property.Resources:
http://en.wikipedia.org/
http://www.nolo.com/article.cfm/pg/2/objectId/D9BA6916-E332-44C0-AE554616F9337002/catId/9F594B71-B41B-4513-923BF19B4D9ACDAA/309/227/FAQ/
http://www.answers.com/topic/will-contest
http://www.1800probate.com/resources/valid-will-contest.html
http://www.investopedia.com/articles/06/RefuseInheritance.asp
http://www.bankrate.com/brm/itax/Edit/basics/Final_filing/basic_3a.asp
http://www.irs.gov/businesses/small/article/0,,id=108143,00.html
http://www.scselfservice.org/probate/prop/FrequentlyAskedQuestions2.htm#long
http://www.divorcenet.com/states/illinois/ilart_04
http://moneycentral.msn.com/content/CollegeandFamily/Loveandmoney/P72670.asp
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