Inheritance

[ILLMAS]

Howdy, one of my client informed that she recieved an inheritance from a family member, I have not had a class like this before, so my question are: Is the estate taxed first then the money is distributed to the family members or the inheritance is distributed to each family member and they are resposible for claiming it to the IRS? Also, for people that recieve an inheritance and have a pension, can the pension be adjusted because of the inheritance, my client is afraid she might lose part of her pension and insurance.

Any help is appreciated.

Thanks

[mcb39]

In any case that I have had like this, the client receives a K-1 from the estate and the only thing that usually ends up being taxable is any interest or dividends accrued by the estate from the time of death until the time of distribution.

[Catherine]

In any case that I have had like this, the client receives a K-1 from the estate and the only thing that usually ends up being taxable is any interest or dividends accrued by the estate from the time of death until the time of distribution.

Sometimes annuity payments end up being partially taxable, as well. But the beneficiary should get a 1099-R from the annuity company next year on that.

[kcjenkins]

First of all, it depends on what she inherited. If she got money, it would not be taxable, with the exception of any interest it earned between the DOD and the time it was distributed to her. If she got stocks, for example, the dividends would be taxable but the value of the stocks at DOD would not be taxable, but would be recorded as her basis in them when she sells them. If she got real estate, it would not be taxable but any money earned from it, such as rents, would be taxable. And the value, for depreciation, would be the FMV at the time she inherited it. If she inherited real estate which she just kept for her own use, it would not be taxable until she sells it, and her basis when she sells it would be that FMV at the time she inherited it.

However, as sometimes happens, the only asset in the estate of the deceased is real estate, and it is valuable enough that there are taxes due on the estate. In this situation, sometimes the heirs chose to pay those taxes so that none of the property has to be sold to pay the tax. In such a case, each heir pays their share of the estate tax. But if there was money to pay the estate tax, or the estate value is low enough that no estate tax was due, then the property comes to them without being taxed, and it's value is 'stepped up' to the FMV as of the DOD or alternate valuation date.

[Joel]

Also don't forget that if an IRA is inherited the distributions would be taxable to the beneficiary.

[mcb39]

Also don't forget that if an IRA is inherited the distributions would be taxable to the beneficiary.

But that, too, would be reported on a 1099R.

[jainen]

>>she might lose part of her pension and insurance.<<

Unlikely, but I can't say absolutely not. Even Social Security has an element of needs-based testing. The terms of her specific benefits could be anything imaginable, and insurance coverage often seems pretty arbitrary anyway. She should at least discuss Medicaid with an estate planner.

[joanmcq]

and this analysis only includes federal taxation. She may live in a state with an inheritance tax, like PA.