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What About the Inheritance Tax?

QUESTION: Bob in Arkansas has a mother who has power of attorney over a 92-year-old aunt who has Alzheimer’s and no kids. When she dies, the mother will receive about $700,000 in an inheritance. Bob has questions for Dave about municipal bonds and the inheritance tax, the latter of which brings some good news from Dave.

ANSWER: There is not any inheritance tax. The only inheritance tax is on estates over $5 million. Your mom needs to see an estate planning attorney on behalf of her aunt that she’s watching over.

See an attorney in the state where she lives because estates are done by state law, not by federal law. The federal law that applies here is that the federal government taxes any estate over $5 million at a tax rate of 55%.

A muni-bond is a municipal bond. That means a municipality or city issued a bond. For instance, if they were doing a street project or a sewer project and the city didn’t have the money, the way that they handle it is to issue bonds and people buy those bonds on the market. That’s the way a city borrows money.

That interest is a low interest rate that her aunt is receiving, but it does not have income tax on it. It’s tax-free municipal bonds. She owns debt on a city somewhere that’s paying interest and the interest is not taxed. It’s an ultra-conservative investment, which is not a bad idea for a 90-year-old.

I think at the time she passes, I would consider investing it in another thing. But for today, everybody knows what it is and knows that it’s a known quantity. Its value probably won’t go in half. You’re taking a little bit of risk, but I probably would leave it there.