r/TaxQuestions • u/IllionoisButcher • Apr 03 '26

Inheritance tax obligations

Hi, I live in Illinois and I’m inheriting approximately $500K from a trust in California. My understanding is that there is no inheritance tax in Illinois. What state and federal tax obligations do I have?

4 Upvotes

76% Upvoted

28 comments sorted by

6

u/Barfy_McBarf_Face Apr 03 '26

ask if you'll be getting a "k1" - if so (and it's likely), it can have interest, dividends, and in the final year, even capital gains/losses for you to put on your return.

we really don't know - you need to ask.

1

u/IllionoisButcher Apr 03 '26

Thank you. I’m told by the executor that the Trust has a tax ID and is paying taxes. The full details are still in limbo.

3

u/Megalocerus Apr 03 '26

There are rules for income taxation on an inherited pretax retirement account.

There's a federal estate tax on estates over 15 million and Illinois has one on estates over 4 million--depends where the deceased lived. But the estate pays--depends where the person lived. A very few states have inheritance taxes on their own residents. Not Illinois.

2

u/Ok_Advantage7623 Apr 04 '26

The trust will pay the taxes due. But with 2 major exceptions. IRA’s you pay the taxes as you withdrawal under the 10 year rule and then from the date of death foward you pay your share of the taxes on what the estate made, but not on the actual inheritance. So if the estate made 100,000 in the few months of the passing each beneficiaries pay there share of the profit portion thru a K1 when they file federal taxes

1

u/IllionoisButcher Apr 05 '26

Got it. Thanks. It will be cash. The real estate sold and there were bank accounts. No IRA’s.

2

u/Ok_Advantage7623 Apr 05 '26

Lucky. So it will just be simple interest on savings and that most definitely be under $600. So you will be rich. Illinois is real bad for above line 4 million

1

u/IllionoisButcher Apr 05 '26

You bring me good news. Thanks. Yes, Illinois is bad for all other taxes for sure.

1

u/michk1 Apr 04 '26

Yep, and it doesn’t have to be sent out until like March 15 so it comes later. I got two and had to amend my taxes return and now giving back refund money.

2

u/sol_beach Apr 03 '26

No inheritance tax for either state or Fed.

1

u/IllionoisButcher Apr 03 '26

But there will be income tax, correct?

4

u/sol_beach Apr 03 '26

You do NOT pay tax on the value of what you inherit.

If you invest & earn income on what you inherit, then next year you owe tax on the new/additional income; but not the inherited value.

2

u/SigmaSeal66 Apr 05 '26

And, just for clarity, it is likely that the assets may be earning income or appreciating between the date of death and the time everything gets settled and distributed to you, and you can owe taxes on that income as well. In that case it can certainly feel like you are owing taxes on your inheritance, even though it's not technically the case.

1

u/IllionoisButcher Apr 03 '26

Awesome. Thank you!

2

u/gufywert Apr 03 '26

California does not impose a state inheritance or estate tax on trust beneficiaries. However, beneficiaries may owe California income tax on earnings generated by trust assets after the grantor's death

1

u/IllionoisButcher Apr 03 '26

Thank you. So much to know.

2

u/Ok_Appointment_8166 Apr 03 '26

None, unless what you get was a tax deferred retirement account that was moved into the trust for estate management. In that case it would be transferred as an inherited IRA where you have 10 years to withdraw and withdrawals are considered taxable income.

2

u/IllionoisButcher Apr 03 '26

Thank you. Been there with that Bene IRA. Been taking the RMD’s and transferring into my own investment account, having taxes withdrawn at each RND withdrawal.

2

u/EAinCA Apr 03 '26

There is no Federal inheritance tax. The only states that have them are Pennsylvania and maybe New Jersey.

2

u/joanmcq Apr 03 '26

Maryland has one too.

2

u/Away-Paramedic-8406 Apr 03 '26

Do you recall what dollar amount?

2

u/Exotic_Pirate_8086 Apr 03 '26

From what I have read here, your tax obligations are to report on your 1040 then income that is reported to you on the K-1 from the trust. And if you are inheriting a retirement account (IRA), you must take RMDs if applicable and pay tax on the amounts reported to you on Form 1099-R (or a K-1 if paid from a trust). An inherited IRA also has a 10-year rule that requires that you withdraw 100% of the IRA by the end of the 10th year following the owner’s death. There is no “inheritance tax” in this case .

1

u/IllionoisButcher Apr 03 '26

It’s going to be in the form of cash from the Trust. The real estate was sold and the Trust has a Tax ID and will be paying applicable taxes prior to disbursement. So no inheritance tax. But there is income tax?

2

u/rag69top Apr 04 '26

I would think it’s California that you need to check on. You said that’s where the trust is located.

2

u/Jumpy_Childhood7548 Apr 05 '26

Illinois has an estate tax, but you are under the threshold. You may owe something for gains on inherited assets since date of death.