How is an Inheritance Trust Taxed?

Inheritance tax is a tax levied when a person receives his or her inheritance. This is similar, but not identical, to the estate tax, which is levied against the representatives of the deceased. Inheritance taxes are state taxes, and not all states charge them. Furthermore, the rules and regulations that govern them vary between the state. If the inheritance is passed down in form of a trust fund, the tax becomes significantly smaller. In some cases, it even drops to zero.

Inheritance and Taxes

In most cases, inheritance tax is levied if the inheritance's value is over $1.5 million. The amount the person has to pay depends on his or her relationship to the deceased. The relatives are charged the smallest percentage of the value - the closer the person is related to the beneficiary, the smaller the percentage. If the deceased is only the friend of the beneficiary, the beneficiary will be charged more. The deceased is the beneficiary's spouse, he or she wouldn't pay any taxes at all. If the beneficiary is younger than twenty-five, the beneficiary’s parents or guardians will bear the tax burden.

How the Trust Funds Fit In

In a trust's fund, the deceased inheritance is held by a third party and handed out to the beneficiary under whatever terms specified by the deceased. The thrust fund can be distributed over a period of time that can range from a couple of years to the beneficiary's lifetime. Depending on the state, the inheritance tax on assets that were put into a trust fund are either significantly lowered or dropped altogether. In some cases, they were deferred until later date.

Benefactors should check the laws of their respective state to find out what kind of inheritance taxes, if any, apply to their trust fund.

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