Understanding Tax Implications for Inherited Wealth: Secure Your Legacy

The Basics of Inheritance and Taxes

Inheriting assets can be a double-edged sword. While it often brings financial relief, it can also introduce unexpected tax burdens. Here are some key points to consider:

• No Immediate Income Tax: Generally, inheritors do not face immediate income tax on the value of the assets received. This means if you inherit cash or property, you typically won’t owe taxes right away. However, this does not mean that all aspects of inheritance are tax-free.
• Estate Tax Considerations: Depending on the size of the estate, federal and state estate taxes may apply. For 2024, estates valued below $13.61 million are exempt from federal estate taxes, but this exemption is set to decrease in 2026. It’s essential to be aware of your state’s laws as well since some states impose their own estate taxes.
• Inheritance Tax: Unlike estate taxes, which are paid by the estate before distribution, inheritance taxes are paid by the beneficiary based on the value of the assets inherited. Only a handful of states impose inheritance taxes, including Maryland and New Jersey.
  

Navigating Tax Implications of Inherited Assets

Understanding how different types of inherited assets are taxed can help you make informed decisions about managing your inheritance:

• Real Estate: If you inherit real estate, its value is stepped up to its fair market value at the time of death. For example, if a property was worth $300,000 at the time of inheritance and you sell it for $350,000 a year later, you would only owe capital gains tax on the $50,000 gain.
• Retirement Accounts: Inheriting retirement accounts like IRAs or 401(k)s can complicate matters. While there’s no immediate tax upon inheritance, distributions from these accounts are subject to income tax when withdrawn.
• Investments: Similar to real estate, inherited stocks or bonds receive a step-up in basis. If you inherit shares worth $10,000 at death but were originally purchased for $1,000, your taxable gain upon selling will only reflect the increase in value from $10,000 onward.

Strategies for Minimizing Tax Liability

To ensure that you preserve as much wealth as possible from your inheritance while remaining compliant with tax laws, consider these strategies:

• Utilize Trusts: Establishing irrevocable trusts can protect assets from being included in your taxable estate while providing control over how and when heirs receive their inheritances.
• Timing Asset Sales: If you inherit assets that may appreciate over time (like stocks), consider holding onto them for more than a year before selling to qualify for lower long-term capital gains tax rates.
• Gifting Strategies: Consider gifting strategies that allow you to transfer assets tax-free up to certain limits each year, reducing the size of your taxable estate.
  

Real-Life Example: The Smith Family

Let’s take a look at a hypothetical scenario involving the Smith family:

• Real Estate Sale: Sarah, Mr. Smith's daughter, inherited a house valued at $500,000. She decided to sell the house shortly after inheriting it. Thanks to the step-up in basis rule, she sold it for $550,000 and only owed capital gains tax on the $50,000 increase in value.
• Retirement Account Withdrawals: Sarah also inherited a $200,000 IRA. By consulting with a financial advisor at Aligned Wealth Advisors, she developed a strategy to withdraw funds gradually over several years, minimizing her overall tax burden.



Through careful planning and strategic decision-making, Sarah preserved her inherited wealth while adhering to all relevant tax regulations.

Conclusion

Navigating the complex world of taxes on inherited wealth doesn’t have to be overwhelming. With proper planning and expert guidance from professionals at Aligned Wealth Advisors, you can secure your legacy while minimizing potential tax liabilities.



Each situation is unique; therefore, it's crucial to consult with a financial advisor or tax professional who can tailor strategies specifically for your circumstances. By understanding the intricacies of inherited wealth and implementing effective strategies for preservation and compliance, you can ensure that your hard-earned legacy remains intact for future generations.

Andrea Ward, CPA

Andrea has worked in the finance industry for nearly all of her professional life. Taking over the family business she continues to combine her tax and investment knowledge to leverage the investment power of money while reducing gains taxes paid to the IRS. She lives in the Fort Worth, Texas area, (although is happy to work with virtual clients all over the United States!) Andrea loves to travel and dabble in home decorating.

Matt Ward

Matt began helping clients in the insurance industry. However, he struggled with big business’s emphasis on selling rather than helping, so he came to work with the family business focusing on investment advisory. In his free time, he shreds the gnar on his snowboard and jams on drums and guitar (but not at the same time).