Q:

Subject: death tax article

 

http://taxguru.org/estate/706.htm

 

Dear Tax Guru - great summary on death and gift taxes.

As you stated, the recipient of a gift does not need to pay taxes.

What in case of a death/inheritance? Does the recipient need to pay federal taxes?

 

Thanks.

A:

Gifts and inheritances are very similar in regard to taxability.  Most items received are not subject to tax on the recipient.  There are a few exceptions to this; most commonly pre-tax retirement accounts, which are classified as Income In Respect of a Decedent (IRD) and taxable to the recipient.  The timing of the actual tax liability is flexible  and was addressed in a recent Q&A that I posted.

The biggest difference between receiving items as a gift versus as an inheritance has to do with the cost basis for the recipient.  In most cases, the cost basis of assets received as a gift is the lower of the giver's cost basis or its fair market value at the time of the gift.  For highly appreciated assets, this literally means that the recipient is accepting the tax liability on any future sale.

For most assets received as an inheritance, the cost basis for the recipient is adjusted (stepped-up) to its fair market value as of the date of death.  For highly appreciated assets, this means the capital gain is erased before the heir receives it and s/he will only be responsible for future appreciation.

This is a very concise and limited explanation of gifting and inheritances.  Any such strategy that you and others are contemplating should be reviewed by an experienced tax pro before setting it into motion.

Good luck.  I hope this helps.

Kerry Kerstetter

Follow-Up:

Hi Kerry -

 

Thank you very much for the detailed answer!

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/15/2006 01:53:00 PM Send this post: