AboutJohn D Smith, CFP Expertise I can answer detailed questions regarding mutual fund investing, retirement planning, education planning and related financial planning/investment issues. I have a B.S. degree in Financial Planning & Counseling. I am also a Certified Financial Planner (CFP) and have performed fee only investment management and financial planning services for the past 11 years.
Question I, along with a few siblings, recently inherited some investments from my parents' estate. The value of the estate was below taxable limits. I understand that the cash and general assets we inherited are free of tax, but am not sure on several investments that may be tax deferred and/or single premium immediate annuities (SPIAs). Is it generally correct to assume that any investments inherited will be tax free (prior to any future gains/income, including non qualified SPIA's, except any investments that may be tax deferred such as IRA's or 401k's? Then, for tax deferred items, are the individual estate beneficiaries responsible for taxes or would the estate liquidate the investments, pay taxes and pass on the after tax proceeds?
Many thanks!
Answer Hi. There are 2 sets up taxes that you need to consider; 1 is the estate tax which is sounds like is not an issue since your parent's estate appear to fall below these limits ($3.5M in 2009). There is also the income tax. For non-qualified assets there is a step up in cost basis which under most circumstances is based on the value of the assets as of the date of death (or the alternative date if used). For qualified accounts (401k's, IRA's, etc) the amount withdrawn from these accounts is considered taxable income to the beneficiary who takes the $$ and therefore they (the beneficiary) is required to claim this on their own taxes and pay the tax as they receive the income. I hope this helps clarify.
