Inheritance: A Different Kind of Debt

If you've ever inherited money, if you've ever been the beneficiary of someone's death, then you might understand why my recent inheritance has been the very reason for my absence from this blog for nearly a year.

Inheritance is about as bitter sweet at is gets when a loved one is involved. (For argument's sake, we'll assume that the loved one to which you're calling to mind is, in fact, loved) On one hand, you're emotionally torn to pieces at having lost your mother, a sister, an uncle, whatever. And, on the other hand, you're being presented with this nice chunk of change that will reduce or extinguish your debts!

I probably wouldn't be the first person in history to say, "Take back the money, just bring my mother back!"

Obviously, it is important to formulate a plan for this sudden influx of capital. And as we've surely learned by now, any extra money we have should go to our insurmountable, heavy, and unbearable debt first! After that, you'll want to refer to the helpful five-step plan in this MSN Money article about managing inheritance. But, one of the biggest issues that arises once an inheritance becomes part of someone's life is, "How much of this inheritance will have to be paid out in taxes?".

Well if you haven't heard of Inheritance tax by now, you'll know all about it soon. And, if it's not inheritance tax that'll trouble you, it may well be estate tax. Either way, read a primer on the two tax types.

So, you're annoyed that the government is going to profit from the death of your loved one, right? That's what it boils down to, isn't it? The government collects money from your loved one when he or she dies. I'm sure that your Uncle Bob was a patriot in every way. But, I doubt he'd appreciate it very much when Uncle Sam steps in at the funeral and says, "Hold on there, partner! I know your uncle is barely in the ground. But, I get first dibs on his property, even though he wanted you to have it all." No, that doesn't seem like good manners at all.

Well, the truth is that those taxes have been in place on estate and inheritance property for so many years, we really shouldn't expect to nullify them any time soon. But, I have something encouraging for those of us who don't stand to inherit vast estates and mutual funds:

Life insurance. That's right, it is my understanding and experience that life insurance is not taxable, at least not in the state of NC as of this date.

Obviously, life insurance is a bit unique. It's not like you're going to plan to receive life insurance from a loved one. Talking to family members during Thanksgiving dinner about life insurance needs is a bit rude.

Really, it's just nice to know that a life insurance inheritance is a relatively ideal kind of inheritance to receive as far as government messiness goes. And, more importantly, it's a good thing to keep in mind when planning to help your children or siblings in the event of your death. Leaving them with a pile of money that's partly and surely going to be taken by the government is definitely less appealing than a smaller, albeit, generous sum that's being paid to them directly by an insurance company. And, who knows, perhaps your careful selection of a life insurance policy will give your kids a chance to break free of their own debt.