Inherited Assets

by on January 11, 2011 at 7:19 pm

What are the tax consequences?

My uncle passed away and
left me a $50,000 inheritance. What will I have to claim on my
income taxes this year?

Most likely nothing.
When we inherit assets the tax is generally to the Estate and not
the beneficiary if at all. Although the Estate Tax has phased back
and forth through the years, it is still alive and well within many
states. A $2,000,000 estate may not have a Federal Estate
Tax due for 2010, but Massachusetts will still want a piece.
Massachusetts is one state that still baselines it’s tax with a
unified credit offsetting $1,000,000. Normally million dollar
estates have other planning strategies in effect that help to
offset estate taxes. An estate under $1,000,000 would not have any
taxes due. It would pass on to the next generation estate tax free.

Any catches? – aren’t there always :)

  • You inherit
    an IRA – This is income that HAS NOT yet been taxed. As such you’ll
    have to show it as income on your 1040 (no penalty) when you cash
    it in

I was executor of a
$600,000 estate and had to pay estate taxes. I thought you said no
estate tax?

Aha – an estate tax it was not…
You were paying an estate INCOME tax. What’s the difference?

  • When someone passes away they cease to be able
    to receive income. Income earned after they pass away, called
    income in respect of a decedent (IRD) is taxable to the

This means if there are a ton of
stocks or accounts earning money, collecting dividends, receiving
rent, or making money in other ways the estate will have to file a
1041 and claim this income.

Isn’t the tax rate 35% at
$10,000 in income

Yup… It’s very aggressive on 1041′s.
If you are administering an estate you may want to investigate
reporting the estate income as passive income to the beneficiaries.
One catch is the beneficiaries have to have actually received the
equivalent amount of income via distributions during the year.
Individual taxpayers are generally below the 35% bracket and
usually don’t have an issue with this as they generally receive the
tax savings as additional distributions.

Things to
remember -

  • Are there any charities
    as beneficiaries? If so see if the estate will allow you to
    distribute the IRA’s/401 (k)’s to them. Non-profits don’t pay taxes
    on income used for charitable purposes. Accordingly, they won’t get
    hit with the distribution taxes
  • Stocks???
    Remember that the cost basis is the fair market value on the date
    of death of the decedent. (keep in mind that this is not the exact
    case for 2010 due to the estate tax repeal) So many people inherit
    GE stock that was purchased in the 70′s and think the cost basis is
    what the decedent purchased it for. It’s the FMV on the date of
    death or 6 month valuation (if elected on an estate tax
  • Stock gains and losses??? Determine
    which beneficiaries will benefit most from a built in loss or

As always, your specific circumstances
may vary. Feel free to post a comment or thread with specific

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