Broker Check
An Inheritance Received: The Complex Tax Landscape Explored

An Inheritance Received: The Complex Tax Landscape Explored

July 13, 2023

At Pro Capital Wealth Management, nestled within the affluent regions of Southlake, Westlake, Trophy Club, Argyle, Colleyville, Flower Mound, and Keller, our mission is to guide our distinguished clientele through the labyrinth of wealth management.

Our clients, including high net worth individuals, business owners, divorcees, inheritors, widows/widowers, celebrities, and professional athletes, each face unique financial situations that demand specialized knowledge. An area of particular complexity is understanding the tax implications when receiving an inheritance.

If you've recently received an inheritance or expect one in the near future, you'll need to prepare for the tax obligations associated with this windfall.

Let's break down some of the essential tax aspects you should be aware of:

1. Estate vs. Inheritance Tax:

Estate tax is deducted from the deceased's estate before distribution to heirs. Inheritance tax, on the other hand, is levied on the beneficiaries after they receive their inheritances. These two forms of taxation are distinct, and understanding their difference is vital.

2. Step-Up in Basis:

Beneficial for inherited assets such as stocks or property, the 'step-up' in basis readjusts the cost basis of these assets to their market value at the time of the benefactor's passing. This adjustment can significantly reduce potential capital gains tax when these assets are sold.

3. Retirement Account Inheritances:

When inheriting retirement accounts like IRAs or 401(k)s, the tax implications can be particularly complex. Specific rules govern when and how much money must be withdrawn from these accounts, with the resulting distributions often being subject to income tax.

4. Spousal Transfers and Taxes:

Generally, assets transferred from a deceased spouse to a surviving spouse are not subject to estate or inheritance tax. However, any income or gains derived from these assets in the future could incur taxes.

5. Life Insurance Proceeds:

Life insurance payouts are typically not taxable income. But be aware that any interest accrued on these payouts could be subject to income tax.

Navigating the intricate tax implications of an inheritance can be overwhelming. But at Pro Capital Wealth Management, our team of seasoned professionals is ready to guide you through each step, ensuring you understand and can effectively manage these new financial realities.