Most of the time, an inheritance is welcomed. Except when it brings an unexpected tax bill.
That's the situation some Pennsylvania residents find themselves in. And it could get worse as Baby Boomers help out their aging parents.
AARP's October Bulletin told of what happened to Carol and Paul Kurland, both in their 80s, and their 56-year-old daughter Amy.
The Levittown, Pa., couple added Amy to their bank accounts to allow her access to funds if they faced a sudden health crisis. That's a common practice in families.
But when Amy died, the Kurlands were hit with a tax bill for several thousand dollars.
The Kurlands had just discovered that under Pennsylvania law, the state considered a third of the money in the accounts to be Amy's property.
Her parents, originators of the accounts, "inherited" it when their daughter died. And they owed a 4.5 percent tax on their unexpected inheritance.
Know the law: Extreme? Yes. But it's Keystone State law. The Pennsylvania Department of Revenue explains in its taxpayer help section:
If my mother's name is listed on my savings account, will it be subject to inheritance tax since it is a joint account? Under the inheritance tax law, the account was jointly owned because you
and your mother had equal access to the account. Therefore, in this
example the survivor is taxed on one-half of the amount in the account.
Jan. L. Brown, an estate planning and probate attorney in Harrisburg, Pa., suggests that families such as the Kurlands consider instead a power of attorney:
A Financial Power of Attorney document allows you to designate someone to act on your behalf with regard to financial and legal decisions. It can be presented to the bank by your daughter and she would then be able to access the account, pay your bills and take any other necessary actions in accordance with the terms and powers in your Financial Power of Attorney document. Financial Powers of Attorney documents can be drafted so that they are effective as soon as you sign them, or so that they are effective only after a physician certifies you are incapacitated.
What are your state's inheritance tax laws? In addition to Pennsylvania, the states of Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey and Tennessee also collect inheritance taxes.
The interactive map below (from Forbes using CCH data) below gives you an overview of these states' laws, as well as those in states that collect estate taxes.
Click on the map to find out more on state inheritance/estate taxes.
If you live in one of them, check with your tax adviser and/or your state tax department to make sure that when one of your loved ones passes away, you don't end up owing some unexpected taxes.
Inheritance vs. estate tax: Many people refer to all taxes collected upon a person's death collectively as death taxes, but there distinct differences in an estate tax and inheritance tax.
An estate tax is a tax imposed on the deceased's estate as a whole. The
executor fills out a single estate tax return and pays the tax out of
the estate's funds. The heirs will only be held liable for the tax if
the executor fails to pay it.
An inheritance tax is a tax imposed on beneficiaries who receive property from the deceased. The tax is calculated separately for each beneficiary, and each beneficiary is responsible for paying his or her own inheritance taxes. Those states that have inheritance taxes frequently tax spouses and children of the deceased at lower rates than other heirs.
The federal government collects an estate tax only. There is no federal tax on inherited property, but money earned on inherited property, such as income from a financial account, is taxable at the federal level.
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