Inheritance and Taxes

Updated on June 11, 2007
P.P. asks from Saint Paul, MN
4 answers

My dad passed away and the forms I filled out said it recommends that 20% of federal be taken out of one lump sum and 10% federal should be taken out of the other. The funds are in his annunity account. I signed off that the tax % to be taken out at time of distribution was okay. I'm assuming I'll have to pay on it at year end too? What do I need to know about this money I'll receive? I don't think I have to pay an inheritance tax?

I'm not sure what suprises may come of this money once I receive it. Anybody have direct experience with inheritance from such an account?

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So What Happened?

I contacted the health and welfare to put a hold on the document and they explained that this money went into the account pre-taxed so any money that comes out must be taxed. They will waive early withdrawal fees due to his death. My dad's union is helping me through this and I feel a CPA or a lawyer will not be able to help me at this time. Thanks for all the advise.

More Answers



answers from Minneapolis on

You're best to check with your accountant right away about this as she or he will know your situation best. If you don't have an accountant, perhaps it's time to get one as they reallyt are an act of frugality. My accountant catches things we miss every year. We inherited money last year and did not need to pay any taxes on it. The rule on cash is that anything under one million can be left tax free. I do not know anything about annuity accounts. Do check with your accountant. The earlier you do this, the better you can plan. If you will owe taxes, your accountant can most likely think up a plan of action (like contributing to a 401K, college savings plan or the like) to reduce the money you'll need to pay in.



answers from Minneapolis on

Hi PC,
First, my condolences on the loss of your father. That has to be horribly difficult.
As for your inheritance, you will pay taxes on the gain of the annuity as ordinary income. Whatever the annuity earned over the years is the gain. This could bump up your tax bracket come tax time so you may pay a bit more/less. All depends on your tax bracket.
I'm an office manager for an insurance company so if you have any other questions, I'm happy to help you, if I can. :) S.



answers from Minneapolis on


I'm a tax CPA and have seen a few tax returns. :)
However don't take my words as legal advice and as always, I do recommend you should see a CPA.

First off, what Shannon said below was correct. Any income on the annuity contract will be taxes at ordinary income tax rates.

To the best of my knowledge there's no inheritance tax in the state of MN (some states do have it at the state level). And there's no Federal tax due to inheritance. However, the inheritance, once the taxpayer passed away, has to pay estate taxes. The estate should have a personal representative who should take care of this matter. Oftentimes it's a family member. Estate tax return is very similar to an individual tax return.

Once all assets (investments including annuties) are distributed, then the estate will file a final return. Then whoever inherits the assets should include the income in his/her income tax return.

Hope this helps.

-Jenn, a mom of two kids



answers from Minneapolis on

probably worth a quick call to a tax accountant. I can give you a referral to someone in Edina if you are interested

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