In addition to the inheritance tax assessed by the IRS, you will also have to pay an estate tax or an inheritance tax that is determined by your individual state. The difference between the two is explained as follows on the Tax Foundation website: “Estate taxes are charged against the estate regardless of who inherits the assets, while inheritance taxes are levied on the transfer of assets to heirs, based on the relationship of the inheritor to the deceased.” To determine how much you will likely be asked to pay on your inheritance, meet with an IRS tax attorney or a general tax attorney prior to spending any of the money.
One of the benefits of meeting with an attorney beforehand is that they can help you determine how much you will receive following IRS and other tax deductions. US News recommends “a cooling-off period before you start spending, financial advisors recommend. A new car, vacation or kitchen renovation may be in your future, but make sure you carefully assess your financial picture and retirement planning goals so you can maximize the inheritance for your long-term financial security.” Your tax attorney can help you make these assessments, or they can recommend a good CPA who will be able to help you develop a strategy for your inheritance.
It can be tempting to spend a lot with a financial windfall, but preparing for the inevitable taxes and giving yourself a cooling off period can help you ensure that you don’t spend all of it. In addition, enlisting the assistance of professionals can go a long way toward securing your future.