Does this sound right? (Stocks, Tax, Inheritance)

[OrangeBandit]

Been a while since I have posted on here but here goes. I was going over my dads retirement and he has a IRA and then he has a diversified portfolio of just stock. His financial advisor told him that when he dies, whatever he has in his STOCK will go to his beneficiary(which is me) and if I want to cash it out, I can do so and NOT pay taxes on it. Dad has asked this advisor about a dozen times if he was sure and his advisor tells him YES. Is there some sort of inheritance loop hole or something that allows this? It just sounds to good to be true in my opinion!

 

[bigcmagor]

Yes. It's called a stepped up basis.

 

[REWahoo]

Here's a little more detail:

The general rule is referred to as the “step-up” basis rule. That is, the heir receives a basis in inherited property equal to its date of death value. So, for example, if Uncle Harry bought Kodak stock in 1935 for $500 and it's worth $5 million at his death, the basis is stepped up to $5 million in the hands of his heirs and all of that gain escapes income taxation forever.

Inherited Property: Basis Rules

 

[OrangeBandit]

Wow! Thanks guys. I figured the Gov't would get their taxes one way or the other.

 

[Winemaker]

But that doesn't mean you won't pay an federal or state inheritance tax; it depends on size of estate and your location.

 

[The Cosmic Avenger]

Most estates aren't subject to tax unless they're over $11.2M (although it depends on the state), but an IRA can be passed down outside of probate, which is much faster and easier (and a little cheaper, but small estates are supposed to be very simple to administer). And if you keep his stocks for a while, as REWahoo said, you only pay capital gains based on the cost basis when you actually inherited the stock. You could liquidate them right away and only pay tax on a few days or weeks of gains, if any, but then you'd pay taxes on the income you withdraw from the inherited IRA.


IMO, because it's taxable income, you're best off holding onto an inherited IRA until you retire, then withdrawing just enough income from it to stay under a particular tax rate or the ACA limit.

 

[EastWest Gal]

It depends on the state dad lives in when he dies, not where you live. Your profile shows you live in North Carolina. If dad is in the same state, you’re golden. North Carolina repealed it’s inheritance tax in 2013.

The inherited IRA will be subjected to ordinary income tax but only on the amount taken out with RMDs. You convert the IRA to an inherited IRA then start taking RMDs based on your life expectancy factor.

When you inherit the stock portfolio, your stepped up basis starts at zero from the date of death. If it needs rebalancing or diversification, it’s a great time to make the changes, because the tax consequences are very small, the only gain (or loss) is the few months in between.

 

[OrangeBandit]

Great info! Yes, Dad and I both live in NC. I have another decade or so to work before I can retire.

 

[N02L84ER]

It depends on the state dad lives in when he dies, not where you live. Your profile shows you live in North Carolina. If dad is in the same state, you’re golden. North Carolina repealed it’s inheritance tax in 2013.

The inherited IRA will be subjected to ordinary income tax but only on the amount taken out with RMDs. You convert the IRA to an inherited IRA then start taking RMDs based on your life expectancy factor.

When you inherit the stock portfolio, your stepped up basis starts at zero from the date of death. If it needs rebalancing or diversification, it’s a great time to make the changes, because the tax consequences are very small, the only gain (or loss) is the few months in between.

Minor correction:
When you inherit the stock portfolio, your stepped up basis starts at the date of death causing your capital gains to be zero on that date.

 

[OrangeBandit]

So what would happen, for example, if on the day of death I took 1/2 of his portfolio and cashed it out? What kind of taxes would be imposed on the cashed out portion if I'm 55 years old when the day comes? Surely there would be some income tax or something. I'm just making sure I got this correct in my head!

 

[RunningBum]

No taxes. This is what stepped up basis is. I would guess the reason for this is if your dad owned a farm or business. If you didn't have step-up basis, you'd probably have to sell it to pay the taxes.

The only tax would be on the estate if it exceeded the $11.2M estate exemption plus any state estate taxes.

Keep reading the sources provided and google other sources. The answer isn't going to change. No reason to keep asking it. I can understand not trusting free advice on a message board, but it's a little frustrating to us when you don't, so find other sources to convince yourself. Also, you got the same response from your father's professional financial advisor.

 

[Ronstar]

What everyone is saying here is correct. I inherited some stock when my dad passed away. I later sold it. I only paid capital gains tax on the difference between the value on the date of his death and the value on the date I sold it. i did not pay any tax on the amount that I inherited - only on the gain after I inherited it.

As to your cash out on date of death question. I assume that there would be no federal capital gains tax on the sale of any stock that you cashed in on the day of death.

 

[Aerides]

Mod note: I updated the thread title to include the "stocks tax inheritance" as this discussion contains valuable info that might be helpful to others searching for similar input later on. OP if I've overstepped just let me know.

 

[OrangeBandit]

Got it,totally understand. Didn't mean to frustrate anyone.Thx!

 

[sengsational]

Stepped up basis does almost seem "too good to be true" when at most turns, where money comes in, Uncle Sam has a rule to "share in your good fortune"

 

[Ronstar]

Got it,totally understand. Didn't mean to frustrate anyone.Thx!

No frustration here. I need to sell some inherited stock again in the future. I'm glad you brought it up.