Paying Tax On Inheritance

Not all assets are treated the same tax wise when you inherit them. It’s important to know what the tax rules are and the distribution options that are available to you as a beneficiary of an estate. In this video we will cover the tax treatment on inheriting a:

Hello everyone i am michael ruger i am the managing partner of greenbush financial group and today we’re going to be going over how certain assets are taxed when you inherit them so we’ll be talking about if you inherit a house if you inherit stocks retirement accounts annuities life insurance if you inherit assets that come from a trust all these different

Types of assets have different tax ramifications when you inherit them also there are estate tax limits that you have to be aware of and then biden might be making some changes to these inheritance rules that you should be aware of for coming months and coming years the most common asset that people inherit is a house so if your parents had a house they pass

Away and then you or you and your siblings then inherit that house and then plan to sell it the question becomes do you have to pay tax when you go to sell that house in many cases the answer is no because people receive what’s called a step up and cost basis and you’ll hear that term referenced a lot during this video what that means is for non-retirement

Assets like a house if your parents let’s say bought that house many many years ago for thirty thousand dollars and then when they passed away the house was worth let’s say three hundred thousand dollars you as the beneficiary of the estate receive what’s called a step up and cost basis meaning your cost basis steps up from their thirty thousand dollars up

To the three hundred thousand dollars which is what the house was worth when they passed away so if you sell that house for 300 000 there is no tax event however it’s not uncommon also for if that estate has to go through the probate process that it could take you know 6 9 12 months before you actually have the house to sell it that if the house appreciates

Between the time they passed away and the time you sell it beneficiaries do have to pay tax on that additional appreciation so in that example you inherit the house it’s worth 300 000 when your parents pass away but then you sell it for 350 you don’t have to pay tax in the 300 000 but you do have to pay tax in the 50 000 that appreciated between the time they

Passed away and the time you sold it the same concept of step up and basis also applies to non-retirement investment accounts so if you receive stock you receive mutual funds that are in like some type of brokerage account that was owned by again let’s say your parents if they bought amazon forever ago for like ten bucks and now it’s worth three thousand dollars

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A share on the day they pass away your cost basis steps up to whatever the value is of those securities on the date they pass you sell them and there’s that step up in basis you don’t have to pay tax when you sell those securities another common asset to inherit is a retirement account like iras 401ks 403 bs and these are tax much differently than the assets

We’ve already talked about so first there’s pre-tax retirement accounts which pre-tax retirement accounts are traditional iras 401ks 403bs with really pre-tax sources and the way those pre-tax accounts work is when you inherit them you can roll them over to your own inherited ira but as you take distribution from them you have to pay ordinary income tax on

Those disbursements when you take them there is no 10 penalty regardless of what your age is similar to if it was a retirement account in your name and you took distributions prior to 59 and a half usually that there’s that additional 10 penalty because they’re considered death distributions you don’t have to pay that early withdrawal penalty but the federal

Income tax and depending on the state you live in state income tax could be waiting for you on those pre-tax retirement accounts now for roth accounts if you inherit you know roth 401k or roth iras you as a beneficiary do not have to pay tax on any of that account value because roth’s accumulated or distributed tax-free as long as that roth account was in

Existence for at least five years there is an important difference though as far as what type of beneficiary you are to that account what your options are when it comes to retirement accounts so spouses and non-spouse beneficiaries have different distribution options that are available to them now i’m just going to give you a 30 000 foot view but i’m gonna put

Links in the description of this video so you can get more details on this because it goes pretty in-depth but just kind of know if you are a spousal beneficiary you have a few options so you can take the cash distribution directly from the account and pay the taxes you can open up an inherited ira and roll that into an inherited ira account or you can roll it

Over to your own personal ira account and then continue to accumulate there now there’s pros and cons depending on your age whether you need the money things like that which you’ll find in the other videos now if you are a non-spouse beneficiary let’s say it’s your parents that you inherited this account from all of the only options you have is to take cash

Distribution from the account or you have to roll it over to an inherited ira and under the new secure act distribution rules that were recently put into place it used to be if someone passed away prior to 2020 you could roll it over to your inherited ira and take just small rmds small distributions over your lifetime and continue to accumulate the account but

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Then they changed the rules for anyone that passed away after 2019 if you are a non-spouse beneficiary you have to usually deplete that full account balance within a 10-year period unless certain exceptions apply and again we’ll put the video in the description below the next asset is life insurance and life insurance is really easy because life insurance is

Typically received tax-free it doesn’t go through the probate process it just goes directly to the beneficiaries annuities are the next asset class we’ll talk about so there’s two different types of annuities there’s qualified annuities and then there’s non-qualified annuities and you can usually tell what type of annuity is by just looking at the statement so a

Qualified annuity is kind of that pre-tax retirement account like an ira or something like that that’s actually just an annuity vehicle so that will kind of follow the ira rules but for non-qualified annuities you can have just really after-tax money put into an annuity they have their own rules because like we talked about investment accounts could potentially

Receive a step up in basis non-qualified annuities do not receive a step up which means if you inherit a non-qualified annuity from your parents and they put 50 000 and now it’s worth 150 normally you would assume you would get that step up in basis when they pass that does not apply to non-qualified annuities when you inherit it you have the same 50 000 cost

Basis that your parents had and then you have to pay tax on the gain within that contract it’s becoming more common that individuals are being more proactive with their estate and actually setting up trust and there’s two types of trusts out there there’s revocable or called living trust and then there’s irrevocable trust and if you’re a beneficiary of these

One of these trusts you may or may not receive a step up in basis depending on the language and the trust document now for revocable living trusts typically those get a step up in basis because they tend to still kind of own the asset they’re just trying to avoid the probate process but for irrevocable trusts they’ve essentially given that house given that

Investment account to that irrevocable trust depending on the language and the trust document you may or may not receive a step up in basis as a beneficiary and i also encourage anyone that has a trust if you set up a trust a long time ago it’s a good idea to go back and review that language because many many years ago the estate tax exemptions on trust so if

You had so much in assets in your estate when you passed away sometimes you had to pay big fed tax but what they did is over the years they increased those limits substantially so not many people pay a state tax anymore but they originally designed those trusts to almost get it out of your estate because when the limits were lower but you don’t get a step up

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In basis if the assets do not go through your estate which then your beneficiaries inherit it and have to pay all the tax but now that the limits have gone up by so much and you have that big exemption you almost want the assets to be in your estate so the beneficiaries then get the step up and basis and don’t have to pay tax on it we’ve seen cases where it’s

We’re talking hundreds of thousands of dollars in taxes just because someone forgot to update the trust document many many years ago so we always say go back and review it while we’re talking about these federal estate tax limits let’s go over the amounts so what these amounts are is if you pass away and all these assets are going through your state and you

Have amounts over a certain threshold you have to pay tax or your state has to pay tax in those amounts before they go to the beneficiaries now with all the rules changes that have happened in recent years as of 2021 and i’m filming this in june the federal estate tax exemption is about 11.7 million dollars so an individual would have to pass away with more

Than 11.7 million dollars in their estate before they would have to pay any federal estate tax so again limits are pretty high but also you have to check check your state tax limits because states could have different limits that vary from the federal limit so you got to almost keep an eye on both because while you might have not have a federal tax liability

You might have a state tax liability depending on where the limits are for the state that you essentially reside in another quick note that 11.7 million dollars is for an individual if you’re married you double that so it’s actually 23.4 million dollars for a joint exemption the biden administration has already communicated that it may make changes to how the

Estate taxation rules work so some of the conversations have been lowering that exemption from that 11.7 down to a lower amount and the other thing that’s really on the table that i think is the biggest risk is they’re talking about taking away the step up and basis so whether they’re going to take it away entirely or they’re just going to set a threshold that

Say hey any assets that you inherit over let’s say a million dollars you don’t receive a step up in basis over that threshold which is going to be huge for a lot of beneficiaries and it could change people’s estate plan so it’s one of those just stay tuned to the legislation see what comes out because it could cause people to have to go and revisit their estate

Plan overall i hope this was helpful feel free to contact me if you have any questions at thank you

Transcribed from video
Paying Tax On Inheritance By Greenbush Financial Group \u0026 Money Smart Board