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Must beneficiaries pay taxes on estate distributions?

On Behalf of | Jul 23, 2023 | Probate & Estate Administration |

Most people in Kentucky who inherit money from a family member won’t have worry about federal estate taxes reducing the amount of their inherited assets as only estates worth more than $12.92 million are subject to it as of 2023. However, do beneficiaries need to pay taxes on estate distributions?

The IRS taxes estates differently

If the executor of the estate performs all the necessary tasks, including going through probate if needed, beneficiaries won’t have to pay taxes on estate distributions. An estate may owe money on income produced by its assets, but the estate is responsible for paying that money to the federal government before the distribution. Only if the estate distributes income assets to beneficiaries before paying taxes will heirs be responsible for paying taxes.

An exception involves inheriting an individual retirement account (IRA). If the IRA is worth less than $12.92 million, you must take the required minimal distribution each year. Inherited IRAs are subject to the 10-year rule if the beneficiaries are not taking life expectancy payments. Heirs must withdraw the entire IRA balance by December 31 following the 10th anniversary of the owner’s death. When you take IRA distributions, the funds will add to your annual taxable income.

Will my estate require probate?

Most, but not all, estates must go through probate to distribute according to the wishes of the individual who created the estate plan. Estate administration refers to the process of managing assets like trusts and life insurance outside of court. Executors must often deal with both.

When selecting an executor, ensure your designated representative is up to the probate and estate administration task, especially if you have considerable assets and multiple beneficiaries. Your appointed representative should be someone you implicitly trust to follow through on your wishes.