Last updated on October 31st, 2018
Inheriting an estate rarely comes without a price. Often, your loved-one’s property will cover any estate debts and fees accrued during their lifetime. However, there are some fees, charges, and taxes that you may be liable to pay.
Debts Assumed by the Estate
Probate & Lawyer’s Fees
An estate that passes through probate accumulates a number of fees in the process. Virginia probate taxes are applied to estates valued at $15,000 or more. However, probate taxes are not applied to property such as:
- Transferred property
- Jointly held property/right of survivorship
- Insurance, pension, or annuity payments
- Pay-on-death accounts
Probate tax is applied to decedent interest in tenancy in common property, as well as all other assets passed to you as a beneficiary.
Virginia probate tax rates are accounted at 10 cents per $100 of the estate’s value. Remember, this is only applicable on estates valued over $15,000.
Probate taxes are paid to the circuit court of your inherited estate’s jurisdiction. The tax must be paid when you are filing the will for probate proceedings, along with a copy of the complete estate inventory.
Creditor & Lender Collections
Generally, creditors and lenders are notified of a client’s death. These institutions have 6 months to file a claim against the estate. Their claim is assessed and settled before you receive your inheritance. The collection of estate debts by creditors and lenders comes entirely from the estate, if the estate is substantial enough to cover those debts.
Creditors and lenders that fail to file for collection within the 6 month window are not able to collect once the deadline has passed. In limited instances, an heir may be liable for the debts of the estate.
If a creditor attempts to recover the debts of an estate from you personally, contact an attorney.
An estate that contains a trust requires the decedent to name a trustee. As trustee, you are compensated for your efforts to preserve the assets of the trust for the benefit of the beneficiaries.
Typically, an estate plan establishes the income of the trustee, whether it be through interest accrued by property of the trust or another source of trust income. However, an estate that does not document how the trustee is paid assumes the trustee’s income through other trust assets.
The cost of burial, cremation, embalming, and any other funeral expenses are assumed by the estate (or, often, the insurance or pay-on-death designation paid out to beneficiaries).
Estate plans often consist of the burial wishes of the decedent. These wishes will likely consider the financial strain placed on the estate, and will compensate accordingly.
If not, the assets of the estate will cover the costs accrued upon death.
Estate Debts Assumed by Beneficiaries
The year you assume ownership of your inherited property, you are required to file property tax on those assets. The property tax is implemented once you are the legal owner of the inherited property.
Your property tax is not based on the value of the estate in its entirety. The portion of property tax that you are subject to paying is based on the value of your inherited property. Inherited property taxes should be filed alongside your personal property taxes for same the year you inherit the property.
Inherited Property Income Tax
While there is no inheritance tax in Virginia, you are still liable for taxes that are tied to your inherited property.
Inheriting property that accumulates an income is taxable, because you are collecting income on that property. While you do not have to pay taxes on inheriting that property, you may have to pay taxes in order to accept the benefits of the property.
Income taxes on your inherited property are filed within the fiscal year of your inheritance. Once you own that property, the income it generates becomes your taxable income. For example, if you inherit property that you decide to rent out to tenants, you are legally able to collect an income from the property’s use. However, you must claim and file income taxes on that property’s income.
Additionally, you are not subject to pay an inheritance or income tax on money or accounts that you inherit. However, if your inherited account begins to accrue interest, you are responsible for the income taxes on the interest of the account.
Income taxes on inherited property must be filed each year that the property is collecting an income.
Federal Estate Tax
Although there is no estate tax in Virginia, there is an active federal estate tax. An inherited estate that exceeds a total value of $5.45 million is subject to federal estate tax. For married couples bequeathing an estate, the value threshold raises to $10.9 million.
The federal estate tax rate currently stands at 35-40% of the estate’s total value.
Generation-skipping Transfer (GST) Tax
A generation-skipping tax is imposed on inheritances that “skip” by two or more generations. Establishing a GST allows the decedent to postpone taxation on the estate, while providing an inheritance for younger generations.
As the inheritor of a GST, you are responsible to pay the GST tax on your inheritance. The GST tax carries a maximum taxation rate of 40%, with the exemption threshold falling at $5.34 million (or $10.68 million for couples).
As the beneficiary of a GST, you are responsible for settling those taxes. Failing to pay any taxes against your inherited estate could result in a lien against your property.
The debts you inherit are as important as the property you acquire. However, failing to settle the debts of your inheritance personally holds you at risk of potentially serious financial trouble.
Schedule a consultation with our estate planning attorney to settle your inherited estate debts or resolve a lien against your inherited property.