At some point in your life, you’ll probably inherit property. Knowing the tax effect of these inheritances can help you navigate the process. First of all, inheritances and gifts are not included in income. Certain income-generating items you inherit may result in taxable income as income is distributed.
In addition, property received from a decedent receives what is called a step-up basis. This means your basis is equal to the value of the property as of the date of death. For example, you receive the home of your deceased grandfather. He bought it for $35,000 in 1960, and it is worth $300,000 in 2020. You sell it for $300,000. Without a step-up in basis, you would have a gain of $265,000. Instead, you have no gain.
You may also inherit an IRA. This is a more complex transaction. The treatment depends on the beneficiary designation and the relationship between the beneficiary and the deceased person.
New legislation: In prior years, distributions to beneficiaries of an IRA owned by a deceased person could be distributed over the lifetime of the beneficiary, but the 2019 SECURE Act limited it to ten years. However, if a spouse is named as the beneficiary of an IRA, the spouse can treat it as their own, meaning they can take distributions based on their lifetime, roll it over into another IRA they own, or treat it as if they are the beneficiary.
If an individual other than the spouse is named as beneficiary, the options are more limited. If you are less than ten years younger than the deceased owner, a minor child of the deceased person, or disabled, you can take the distributions over your lifetime. New legislation: In all other cases, the beneficiary must take the distribution over ten years due to the 2019 SECURE Act change.
Listing the estate as the beneficiary should be avoided if at all possible. The estate is not considered a designated beneficiary, and the distributions are made over five years instead of ten years. If you find yourself in this situation, I can help you find out if there’s a way to mitigate the effects. Here’s an opportunity for you to help others by reminding them to verify that they have a beneficiary listed on their IRA and retirement accounts.