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A living trust can avoid probate, if your assets have been re-titled into the name of the trust. The probate process is used to pass assets from one generation to the next in cases where the person has no documents, or only has a Will covering assets for an estate in excess of $166,250. Probate takes a minimum of six months, and frequently longer. The cost of probate is two-fold—Court costs in California are now about $1,500. The attorney’s fees and executor’s fees are based on the size of the estate.
The current annual exclusion (for 2020) for gifts is $16,000 per person per year, but if you give more than $16,000 in a single year, there is a reporting requirement that you report the gift to the IRS. The gift will not be taxable: it just starts to count against the $12,060,000 lifetime gift exemption for a single adult, or $24,120,000 exemption for a married couple. For 95% of people, the exemption maximums are never reached, so they never have to pay gift taxes.
The answer depends on whether the money has already been taxed. The estate of the person leaving the inheritance may be subject to estate taxes, if the total amount given exceeds $12,060,000, as explained above. For the person receiving the inheritance, the money is usually not considered income. However, if the money that you receive is from an IRA or 401K, and the original owner did not pay tax on the money, you (the beneficiary) will pay tax as you take it out of the account. You should contact a financial planner or a tax professional to learn about ways that you can spread the tax by taking distributions over a longer period of time.
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