What To Do When A Loved One Dies And Leaves You Assets
When a loved one dies, so many arrangements need to be made that the logistics behind receiving an inheritance are often placed on the back burner. Of course, the last thing you want to consider is what taxes could be applied to money passed down from a lost loved one, so we are here to simplify the process.
Often a benefactor wonders whether or not they will receive their inheritance tax-free, and the simple answer is it depends on several factors. For example, if your loved one sets up a trust, a trust tax return is likely needed. In other cases, an estate tax is paid before any inheritance is distributed. But there are some cases where money can be transferred tax-free!
You are able to gift $17k or less to one individual a year with no paperwork necessary. This amount changes yearly, so be sure to stay current with the amount for annual exclusions. Any amount gifted that is higher than the annual exclusion amount is subject to a gift tax that the donor generally pays. In this case, you must file a gift tax return form.
IRAs generally avoid an estate tax because the beneficiaries were named when the account was opened and can be transferred tax-free to them. If this money stays in the form of a retirement plan, it’s not taxable. The beneficiary can also choose to cash out these funds. That money is not penalized regardless of the beneficiaries age at the time of the transaction but does become taxable. This is all extremely straightforward unless the person who has passed is over the age of 72. At that age, they needed to start taking Required Minimum Distributions. In these cases, the IRA must be cashed out within five years. This impacts taxability, as it is no longer living in a retirement account.
Finally, you may inherit assets previously owned by your loved one that passed. This may be in the form of homes, stocks, or rental properties. If you choose to hold these assets, you’ll pay the taxes on any gains or perhaps experience the tax benefits of a loss.
This may seem confusing, but we can help explain it with an example: let’s say your father passed, and he owned a home with a fair market value of $200k on the date of his death. Because you live out of state and don’t want the house for your personal use, you choose to sell it. However, it doesn’t sell until over a year after his death, and its appreciated value lets it sell for $325k. Your taxable gain on this transaction is $125k. So should you have sold the property immediately to avoid tax liability? Maybe. Between the closing costs and costs to ready the home for sale, it may have sold at a loss, which could mean a more significant tax return for you.
The same scenario applies to stocks. You can transfer them to your name and hold them to sell later. If you do this, ensure your financial advisor is aware of the “step-up in basis.” This means your newly inherited stocks must reflect their current value, not what your loved one paid for them back in the day. This could mean huge savings!
If you are looking for more information related to specific situations arising with your inheritance, check out the IRS page about gifts and inheritance. However, if it all becomes too overwhelming, we would love to help you, or you can access another blog on this topic on our website! We want you to receive the maximum tax benefits during a time that can be filled with discomfort and uncertainty. So, if you need our help, reach out to us today.
