What it is:
An inheritance includes those assets of an estate that are bequeathed, in whole or in part, to specific heirs.
How it works (Example):
The assets that comprise an estate are customarily transferred to individuals specified by name or relationship (e.g. "Howard Jones, III or "grandchild") in the will of the deceased. In the absence of a will, estate assets are transferred according to laws that protect the assets of the deceased (generally passing them to descendants in a specific order). Once transferred, an inheritance is heavily taxed.
For example, Jim's estate is worth $10,000. His will specifies that his son and daughter each receive $5000. Following Jim's death, the son and daughter each receive $5000. This is their inheritance.
Why it Matters:
An inheritance represents the material legacy an individual leaves behind after his death. In addition to the family dynamics involved in the transfer of an inheritance, there are significant tax implications for the inheritors depending on their circumstances and on the value of assets received.