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Estate Planning: Catching up on reader’s questions
Estate planning

Estate Planning: Catching up on reader’s questions

Q: How do you report an inheritance on a tax return?

A: An inheritance is not treated as income for tax purposes. However, that’s not to say there are never income tax consequences as the result of an inheritance. It will greatly depend on the circumstances.

It’s possible that the estate has income which might distribute out to the heirs. For example, if the estate liquidates some savings bonds that have tax deferred income in them, it is possible that the income will be distributed out to the heirs along with the non-taxable inheritance. If income, or loss for that matter, is distributed from an estate to an heir, it would be reported on an IRS form K1. The income from the K1 would then be reported on the heir’s personal income tax return.

Fortunately, unless the estate has a lot of tax deferred income, the distributed income is usually small. Not always, but unless there are unusual circumstances or the estate generates an unusual amount of income, it’s usually not that big of a deal.

Finally, remember that I am referring to an inheritance from an estate. If you are the beneficiary of a tax deferred asset like an IRA, it’s possible that a large portion, or even all of, the distribution, is taxable income. In those cases you should receive an IRS form 1099 which you will have to report on your personal income tax returns.

Q: Are adopted children treated the same in a will as naturally born children? Should the adoption be mentioned in the will?

A: Yes, legally adopted children are treated exactly the same as biological children. It can’t hurt to recite the fact that a child has been adopted but, assuming it’s a legal adoption, it’s probably not necessary.

Keep in mind that we are talking about adopted children and not stepchildren. Stepchildren don’t have the legal recognition that adopted children have and don’t have the same legal rights. Stepchildren that are being included in an estate plan should absolutely be addressed in a will or trust.

There is no legal distinction for estate purposes between biological and adopted children. There is a legal difference between biological and step children so make sure that if you wish to include stepchildren in your estate plan, discuss it with your attorney.

Thanks for the questions.

Christopher W. Yugo is an attorney in Crown Point. Chris’ Estate Planning Article appears online every Sunday at www.nwi.com. Address questions to Chris in care of The Times, 601 W. 45th Ave., Munster, IN 46321 or to Chrisyugolaw@gmail.com. Chris’ information is meant to be general in nature. Specific legal, tax, or insurance questions should be referred to your attorney, accountant, or estate-planning specialist.

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