Wealth Management & Financial Planning

Wealth Management & Financial Planning

Inheriting Appreciated Assets

Death is a natural consequence of life. Most of us will have assets of one nature or another left behind for others at our passing. How does that transfer work?  What are the tax implications? What do you need to consider?

Assuming the asset is titled jointly with your spouse, regardless of the asset type, the transfer is estate and income tax free. The same is typically true if the asset was owned by a trust. Tax deferred assets – IRA’s, 401k’s, etc. – transfer via a beneficiary designation. The taxation is very different for retirement assets than for a house or even a brokerage account. The rules become more complicated if the beneficiary is not your spouse or not jointly owned with your spouse.

Retirement assets will go as the beneficiary form directs.  If your spouse is your beneficiary, they will use the assets based on their life expectancy and IRS regulations. They will pay taxation at the marginal rate on the distributions they take and could also be subject to a 10% early distribution penalty if they are under age 59.5.

If a charity is your beneficiary, there are no other income tax requirements. If any other living beneficiary inherits your retirement assets, they will have to withdraw the entire value at the end of 10 years beginning the year after the owner dies. They can remove income, without penalty, over the 10-year period. The money will be taxed at the marginal income rate of the beneficiary each year a distribution is made.  If the inherited account had Roth type assets, there will be no taxation, but the 10-year distribution requirement is still required.

If the asset is a stock outside of an IRA or real property like farm ground or a home, the beneficiary will receive a step-up in basis on the asset.  Basis is the amount of money that has already been taxed before purchasing the asset. Step-up in basis means that the recipient does not have to pay income tax upon the sale of the asset as their cost basis becomes the current fair market value. If a farm that had a cost basis per acre of $1,000 was passed on at death to a son or daughter, the basis would be fair market value today.  Comparatively, if the farmer sold the land during life, they would pay taxes on the capital gain on the difference between the selling price today and their original cost basis.

Similarly, if the farm was given to the children when the farmer was alive, the basis remains the original basis and there is no step-up in basis. When an asset is transferred and who receives the gift is very important from a tax standpoint.

Inheriting assets typically means you lost a loved one. It can be very stressful and confusing. Proceed with professional guidance and try to separate emotions from sound financial planning.  This is true for people who have terminal issues as well.  Plan before they pass.


Disclaimer: Joseph Clark is a Certified Financial Planner™ and the Managing Partner of Financial Enhancement Group, LLC an SEC Registered Investment Advisor. He is the host of “Consider This” found on WIBC Saturday mornings from 6-7a.m. as well as three other Indiana-based radio stations. Joe has served as an Adjunct Assistant Professor at Purdue University where he taught the capstone course for a degree in Financial Counseling and Planning. Financial Enhancement Group is an SEC Registered Investment Advisor. Securities offered through World Equity Group, Inc., Member FINRA/SIPC, and a Registered Investment Advisor. Investment Advisory services offered through Financial Enhancement Group (FEG) or World Equity Group. FEG is not owned or controlled by World Equity Group. Joseph Clark and World Equity Group, Inc. do not provide tax or legal advice. For tax advice consult with a qualified tax professional. For legal advice consult with an attorney.

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