If you’ve just inherited an IRA, annuity, stocks, bonds, or other assets from your parents, minimizing your tax obligation is critical. What do you need to know to keep Uncle Sam from taking more than his share when you file your tax return? In this three-part series, Attorney Franklin Drazen covers a few of the basics. This week, we look at stocks, bonds and mutual funds.
Inherited retirement accounts like IRAs and annuities, and assets like stocks, bonds and mutual funds live at the tricky three-way intersection of estate planning, financial planning and tax planning. That’s why I advise my clients who’ve inherited these assets to do nothing until we’ve met to explore their options. When you inherit assets from a deceased parent, your actions will determine your tax bill. The worst thing to do is to sell the stock, bond or mutual fund, put the proceeds in your account, and then come to see me saying, “Now what?” This week, we look at a few of the basic tax implications of inherited stocks, bonds and mutual funds.
Let’s say that your father had a considerable portfolio of stocks and bonds. He died and you’re the heir. What are the tax implications for you? If you hang on to the stock, no problem. But if you decide to sell it, you must report on your tax return the sale for the stock you inherited. But since you inherited the stock, your “cost basis” for calculating the gain or loss will generally be the fair market value of the stock on your father’s date of death. You only have to pay income tax on the amount over what the stock was worth on the day your father died, which makes establishing the “date of death” value very important. Let’s say that your father bought shares of a stock at $5 per share and the price had increased to $20 per share on the date of his death. When you go to sell that stock, you’ll only pay taxes if you sell it for more than $20 per share. Better yet, because the stock represents a long-term capital gain, the gain is taxed at the lower capital gains rate rather than ordinary income rates. It’s worth noting that the appreciation of the stocks or bonds before your father’s death will not be subject to income or capital gains tax.
Sound confusing? It is. The tax laws governing the transferred assets from one generation to the next are complicated, frustrating and arcane. Fortunately for you, the professionals at Drazen Law Group are well equipped to help you develop a strategy that will make sure that family wealth ends up where your parents wanted it to be. Just give us a call at 203.877.7511.
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