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What if You Receive an Inheritance

| November 17, 2016
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Inheritance is the practice of passing on property, titles, debts, rights and obligations upon the death of an individual. For most of us, inheritance means receiving something of value from those close to us, upon their death. Inherited items commonly include jewelry, a home, cash, retirement or brokerage accounts, and miscellaneous household items. While the items that have a personal connection are usually kept, the others are often times sold so the heir can put the proceeds to better use for themselves, which is typically what the deceased would prefer anyway.

One area that can be confusing is to what extent taxes affect an inheritance.

To help decipher the tax implications of some of the more commonly inherited items, let’s look at a few examples:

  1. House: If you inherited a family home and choose to sell it close to the family member’s date of death, it is likely you will pay little, if any, taxes on it. The reason being is that while an inherited property that you do not live in is considered an investment, you receive a stepped up basis (upward readjustment in value) in the property to the fair market value at the time of the death. For example, if you inherit a home from your dad and he paid $300,000 for it 20 years ago, but today upon his death it is appraised for $500,000, your ‘basis’, or asset cost, is bumped up to $500,000. That means that if you sold the property for $510,000, you would only pay taxes on the $10,000 gain. Also noteworthy, that $10,000 would be taxed as a long-term capital gain which is generally a more favorable tax rate. 
  2. Brokerage Accounts: Assume your mother had a brokerage account with $300,000 of P&G stock that she accumulated over the course of 30 years. While she may have bought that stock at various price points, when she dies, all the P&G stock will receive a stepped up basis to the value of the P&G stock on the date of her death, similar to the house example above. Specifically, the new basis is an average of the highest and lowest quoted selling prices on the date the original owner, your mother, died (unless she died on a weekend, then slightly different rules apply).
  3. Retirement Accounts: IRA’s and other tax-deferred accounts (e.g. 401k’s) do not receive the tax favorable treatment upon death of the owner as houses and brokerage accounts do. If you inherit a retirement account, the choices on what to do can be more complicated as there are multiple distribution decisions to consider depending on the type of account, if you are the spouse of the decedent, their age at death, etc. It is best to consult a professional financial advisor to discuss your options.

Of note, the above examples assume a step-up in basis to the fair market value of the underlying asset at the date of death. There is a section of the IRS code, 2032, which allows for an alternate method of determining the inherited property’s new basis; however, that is outside the scope of this article.

If you’d like to explore this area further, please contact Jim via email [email protected] or 513-598-5120.

Date Posted: 11/17/2016 Advice provided in this article is meant for educational purposes only and financial education is important to us. Before making decisions regarding your personal financial situation, please consult an advisor or conduct your own due diligence. If you would like to discuss your Wealth Accumulation or Retirement Income Plan with an HCM Wealth Advisor, please give us a call at 513-598-5120. Located in Cincinnati, Ohio, we serve clients in 23 states, and we’d love to help.

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