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How are inherited assets taxed to the recipient?
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Not all assets that can be passed on are treated the same for tax purposes.  In drafting your estate plan, consider the impact of taxes on your heirs.

 

Non qualified accounts receive a "step up” in basis. That means their cost basis is not what the deceased paid, but rather the asset’s fair market value on the date of death or six months later (if not already sold).  When the asset is sold, any gain is taxed at Short-Term or Long Term Capital Gains rates.  How the account is titled impacts the "step up" in basis calculation.

Traditional IRAs and employer-sponsored plans (pre-tax) are taxed at the ordinary income rate of the beneficiary at the time of withdrawal.

Non Deductible IRAs and other non-ROTH after-tax qualified plan withdrawals:  an IRS formula determines which percent of each withdrawal is a return of basis--not taxed--vs. growth--taxed at the ordinary income rate of the beneficiary.

ROTH IRAs and ROTH employer-sponsored plans are not subject to income taxes when the beneficiary takes a withdrawal—as long as the deceased’s original ROTH had been funded for 5 years.

Life Insurance benefits are not taxed to the beneficiaries.

Assets titled in Irrevocable Trusts DO NOT receive a step up in basis. The basis is the original purchase price + any commissions/fees.

Assets titled in Revocable Trusts DO receive a step up in basis.

 

 

<NEXT:  Practical Considerations when developing your Estate Plan>

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