It is not uncommon to leave an inheritance to family members after you die. You may leave a lump sum to your children, grandchildren, nieces, nephews and other loved ones. Inheritances aren't limited to money; you can also leave real estate and other personal property. While many people wait until after they're deceased to leave an inheritance, you can leave your loved ones an early inheritance -- money or property you give before you die. If you plan to leave an inheritance, consider the benefits of an early inheritance.
Avoid Inheritance Tax
If you wait until after you die to give your heirs an inheritance, they may be subject to an inheritance tax. Inheritance taxes are taxes paid by each of your beneficiaries to their state's government. This tax is a percentage of the value of the asset, and percentages vary by state. Some states, such as Virginia and Florida, do not impose an inheritance tax. However, inheritances are subject to taxation in states like Maryland and New Jersey. Leaving an early inheritance is a simple way to avoid an inheritance tax. State governments impose inheritance taxes only when heirs receive assets and property after your death.
In addition to helping your heirs avoid an inheritance tax, leaving an early inheritance can provide your children, relatives and friends with quick financial help. If your beneficiary plans to buy a house or experiences economic hardship, an early inheritance can provide a monetary boost. You may also want to use an early inheritance to help with wedding expenses, buying a car or paying off debt.
Early Inheritance and Gift Tax
Any early inheritance that you leave your relatives or friends is a gift, according to the Internal Revenue Service. These gifts may be subject to federal income tax, but you can avoid taxation by adhering to certain rules. Each year, the IRS allows you to give or "gift" up to $13,000 per person. To avoid a gift tax when giving away cash or property, the value of both cannot exceed $13,000. If you're married, you and your spouse can both give up to $13,000 and avoid taxation. For example, if you and your spouse give your daughter an early inheritance of $30,000 to purchase a house, $26,000 of that money is tax-exempt. The remaining $4,000 is subject to the gift tax.
The IRS does not impose the gift tax on all cash and property you give away. You can give or "gift" cash and property that exceeds $13,000 and avoid the gift tax in certain circumstances. Items not subject to taxation include money you give to your spouse, college expenses or medical expenses you pay for someone and donations made to an organization.
Video of the Day
- money image by cherie from Fotolia.com