As baby boomers continue to get older, a transfer of wealth is passed on to the next generation. When a person passes away, their assets must be used to pay off their liabilities. The net amount can then be inherited by others. This podcast covers the tax impact on receiving an inheritance.
So let’s start at the beginning, when a person passes away, their assets must be used to pay off their liabilities. The net amount can then be inherited by others.
I HAVE HEARD THAT IF YOU RECEIVE AN INHERITANCE YOU WILL NOT OWE ANY TAXES.
- Generally true – cash, investments and real estate.
- Not true for IRAs, annuities and retirement accounts.
WHY THE DIFFERENCE IN TAX TREATMENT?
- In Wisconsin and many states – step up in basis. You do not get a step up for IRAs, annuities and retirement accounts.
- No step up for assets where the person received a tax deduction when they put the money into it.
WHAT IS A STEP UP?
- No matter what the asset cost – the new cost basis is the FMV at date of death – no gain.
- Joint tenancy – half step-up
- WI (community property) double step-up.
- Income assets do not get step up and will be ordinary income.
WHAT ABOUT LIFE INSURANCE PROCEEDS?
- Tax free
WHAT ABOUT INCOME EARNED ON THE ASSET AFTER YOU RECEIVE IT.
- Taxable – the same way as any other asset.
- Knowing the rules on inherited property will help you ask the right questions when talking to a tax professional.
Be sure to talk to a tax professional if you have any questions about your the tax impact on receiving an inheritance.
As a partner, I have thorough experience providing tax services to individuals, privately held businesses, nonprofit entities and estates and trusts. I also provide compilation and review services.
