Receiving a sum of money from inheritance can give your financial situation a big boost. However, without adequate information, individuals who receive inheritance may also find themselves slapped with a sizeable tax obligation. Below you’ll find several ways that you can reduce your tax liability when you receive an inheritance.
Create a Trust
Encourage the grantor of the inheritance to create a trust to handle their assets rather than a will. A trust permits assets to be distributed among beneficiaries without the expenses associated with probate. A revocable trust can help reduce the inheritance’s taxable value, saving you money.
Giving to Charity
By giving the money away to a charity you can actually decrease the money you owe. That’s because both federal and state governments provide tax deductions for any money used for charitable giving.
Reduce Retirement Account Distributions
Transfer any retirement accounts you inherit to a personal IRA and only take the required minimum distribution for that money to be dispersed. If you are young, calculate the required distribution amount based on your age. The distribution you receive will be smaller, but your tax liability will be lower and the money you save in the IRA can grow, tax deferred.
Use the Alternate Valuation Date
If you inherit property, taxes owed are based on the property’s fair market value. The alternate valuation date can increase the amount of inheritance you receive if the date reduces the gross amount of the estate and its tax liability.
Using these financial strategies for your inheritance will help you avoid paying more taxes than you should.
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