Inheritance Tax Checklist: Know Before You Sell

Inheritance taxes are complicated. Many people don’t realize that inherited assets—property, stocks, investment accounts, etc.—may be subject to taxes and that there are specific tax rules for each type of asset or account. So before you start selling off assets, make sure you know the rules.

We are not talking here about estate taxes. Estate taxes apply to the total value of everything you own; real estate, stocks, bonds, retirement accounts, defferred annuities, businesses, farms, and even the death benefit values of any life insurance policies owned by you. With current 2020 estate tax rules, federal estate taxes will only impact singles with an estate of $11.58M or more, or married couples (if they’ve done proper planning) with an estate worth $23.16M or more. Needless to say, federal estate taxes will not affect most of us. (Note: some states still assess a separate state-level estate or death tax.)

So, if we’re not talking about estate taxes, what are we talking about when we say ‘inheritance taxes?’ We’re talking about various types of income taxes owed on inherited assets.

Regardless of the value of the decedent’s estate, you may still owe income taxes on certain assets that were left to you. Here’s a checklist of the most common assets that beneficiaries inherit and information on the relevant taxes:

Previously, with an inherited IRA, you could take required distributions based on your life expectancy. If you desired, you could have taken out more than this amount, but not less. With this approach, you would have only had to withdraw Required Minimum Distributions (RMDs) each year, allowing you to stretch the income and taxes on this inheritance. But not anymore.

With the passing of the Secure Act in 2019, a non-spousal beneficiary will no longer be able to take advantage of life expectancy RMDs and extended tax defferral. Instead, they are required to withdraw the inherited account within ten years, which could result in putting a beneficiary in a higher tax bracket.

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A final few words of advice. After a loved one passes, and you are in mourning, regardless of how smart and savvy you are, you will be vulnerable not only because of your emotional state but simply because you will be learning about new and complicated topics. Don’t be fooled by creditors who may attempt to collect debts from family members of a deceased person. These claims should be made against the estate, not against you. You may also inadvertently fall victim to someone, who, learning of your recent windfall, tries to sell you investments or insurance products. Do not make any investment or insurance purchases without going through a comprehensive financial planning process.

Tax laws are complex. If you expect to receive an inheritance, this might be the perfect time to start searching for a qualified professional who can help you decide what to do based on your situation and future goals.

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