Tax Implications of Inheritance
The U.S. will see the transfer of $6 trillion dollars over the next 30 years. If you receive an inheritance, you may have some questions about the estate administration process, the impact on your taxes, and whether you should make changes to your own estate plan.
The process of wrapping up an estate involves collecting assets, paying liabilities and expenses, and distributing the remaining property to the beneficiaries. The person who is responsible for this process has a lot of work to complete and they will likely need to engage a team of advisors to assure everything is handled properly.
A beneficiary usually has questions about the tax implications of receiving an inheritance. While your inheritance might be reduced by the federal estate tax depending upon the value of the decedent’s estate, and in Nebraska a county-level inheritance tax will likely also apply, the personal representative or trustee is the party responsible for preparing the returns and assuring the tax payments are made.
There is a common misconception that a person who receives an inheritance must pay income tax on the property received. While a beneficiary does not pay income tax when receiving an inheritance, there are future income tax implications for the beneficiary due to a change in the “basis” of the inherited property. Under current law, you receive a “stepped-up basis” in inherited property, which means your basis will be equal to the fair market value of the property on the date of the decedent’s death. This concept is best explained by an example.
If your father purchased a share of stock for $100, his income tax basis in the stock is $100. If he sells the stock when it is worth $1,000, he will pay income tax on the total $900 the stock increased in value while he owned it. Compare the result if your father bequests the stock to you instead. If the stock is worth $1,000 when he passes away, your basis in the stock is “stepped-up” to $1,000. If you later sell the stock when it is worth $1,050, your taxable gain is only $50 – the amount the stock increased in value since the day your father died.
If you have questions about whether inherited property is subject to your creditors or questions about the impact of an inheritance on your own estate planning decisions, or if going through the estate administration process makes you realize you want to simplify the process for your future beneficiaries, you should talk to an attorney knowledgeable about family, estate, and tax laws.
ABOUT THE AUTHOR – LISA M. LEHAN
I am a shareholder of Koley Jessen P.C., L.L.O., located in One Pacific Place. My practice is focused on estate and tax planning. Outside of the office, I enjoy spending time with my husband and our three children. For help with your family’s estate planning needs, please contact me directly at 402.343.3881.