The best way to avoid the inheritance tax is to manage assets before death. To eliminate or limit the amount of inheritance tax beneficiaries might have to pay, consider: Giving away some of your assets to potential beneficiaries before death. Each year, you can gift a certain amount to each person tax-free.
While state laws differ for inheritance taxes, an inheritance must exceed a certain threshold to be considered taxable. For federal estate taxes as of 2024, if the total estate is under $13.61 million for an individual or $27.22 million for a married couple, there's no need to worry about estate taxes.
Life insurance. The second way is with life insurance. It allows you to leave an inheritance without your beneficiaries having to pay income tax on the money they receive. So if you buy a policy with a $250,000 death benefit, your heirs will actually get $250,000.
If you received a gift or inheritance, do not include it in your income. However, if the gift or inheritance later produces income, you will need to pay tax on that income.
Inheritance checks are generally not reported to the IRS unless they involve cash or cash equivalents exceeding $10,000. Banks and financial institutions are required to report such transactions using Form 8300. Most inheritances are paid by regular check, wire transfer, or other means that don't qualify for reporting.
Strategies to transfer wealth without a heavy tax burden include creating an irrevocable trust, engaging in annual gifting, forming a family limited partnership, or forming a generation-skipping transfer trust.
One good way is to leave the inheritance in a trust. The trust can be set up with some provisions, such as making distributions over time.
The most direct way to minimize inheritance tax is to start gifting your heirs money each year while you're still alive. Taking advantage of the gift tax exclusion of $17,000 per year per person is a quick way to transfer non-taxable cash or assets to heirs.
This means that when the beneficiary withdraws those monies from the accounts, the beneficiary will receive a 1099 from the company administering the plan and must report that income on their income tax return (and must pay income taxes on the sum).
Form 8971, along with a copy of every Schedule A, is used to report values to the IRS. One Schedule A is provided to each beneficiary receiving property from an estate. Form 8971 instructions PDF. This item is used to assist in filing Form 8971.
Immediately after receiving an inheritance, you should notify your local Social Security office.
Many states assess an inheritance tax. That means that you, as the beneficiary, will have to pay taxes when you receive an inheritance. How much you'll be assessed depends on the state you live in, the size of your inheritance, the types of assets included, and your relationship with the deceased.
Many people worry about the estate tax affecting the inheritance they pass along to their children, but it's not a reality most people will face. In 2025, the first $13,990,000 of an estate is exempt from federal estate taxes, up from $13,610,000 in 2024. Estate taxes are based on the size of the estate.
Medium inheritance ($100,000)
If you receive a larger inheritance, first consider the recommendations above—fund an emergency savings account or pay off credit cards and loans. You can also use a portion of the money to pay off all or part of your mortgage or pay down student loan debt.
When a house is transferred via inheritance, the value of the house is stepped up to its fair market value at the time it was transferred, according to the IRS. This means that a home purchased many years ago is valued at current market value for capital gains.
An inheritance tax is levied on the value of the inheritance received by the beneficiary, and it is paid by the beneficiary. There is no federal inheritance tax. Inherited assets may be taxed for residents of Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
Bottom Line. California doesn't enforce a gift tax, but you may owe a federal one. However, you can give up to $19,000 in cash or property during the 2025 tax year and up to $18,000 in the 2024 tax year without triggering a gift tax return.
Inherited properties can come with financial responsibilities such as existing mortgages, unpaid property taxes, maintenance costs, and insurance requirements. Be aware of hidden costs, including emergency repairs, property management fees, and legal expenses.
If you are expecting an inheritance from parents or other family members, suggest they set up a trust to deal with their assets. A trust allows you to pass assets to beneficiaries after your death without having to go through probate.
In these circumstances, a trust can help set up specific management plans for your assets, provide tax benefits and give your beneficiaries time to adjust to having assets held for them. If you have a straightforward estate and mature adult children, leaving assets outright to them might be appropriate.
Can IRS seize inherited property? Yes, the IRS can seize inherited property for unpaid taxes after following its standard process of notices. Can the IRS take inheritance money? Yes, the IRS can take inheritance money for unpaid taxes.
Use the annual gift tax exclusion.
Each year, you can give a certain amount of property to a family member without incurring gift taxes. As of 2024, the annual gift tax exclusion is $18,000 per recipient. This means you can gradually transfer property over several years to minimize tax liabilities.