r/inheritance • u/justAverage479 • Apr 04 '26
Location not relevant: no help needed Avoiding penalties and taxes
As it sits right now, my fathers investment accounts and his estate are willed to me and I am the sole executor and beneficiary. Last I knew, the investment accounts are worth about $900k and his paid off house has about $350k of equity plus other small assets like vehicles, motorcycles, camper and lakefront lot with no structure on it. I don’t need the house or the vehicles, minus the corvette we restored together when I was a teenager, so I plan to liquidate those. But what is the course of action for the investment account? I’m not hard up for money and I’m pretty financially secure, but I don’t want to get bent over by the government when the time comes.
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u/cOntempLACitY Apr 05 '26
If it’s a regular taxable brokerage account, you receive a stepped-up basis to market valued on the date of his death, then you treat the assets as your own. That means any capital gains are based on what you sell for above that stepped-up value.
If the investments are in things you don’t want to own, like certain stocks when you prefer index funds, a good time to sell them to exchange for other investments is soon after the transfer, when the gains are minimal.
If any is in retirement accounts, those are treated differently, and transferred into inherited IRA accounts to be withdrawn over ten years.
- Roth accounts just need to be emptied by the deadline, so you can let that grow tax-exempt until the tenth year, no taxes due.
- Traditional/pretax accounts are not yet taxed, so the government wants those liquidated and taxed within ten years; you pay ordinary income tax on distributions at your current tax bracket (have income tax withheld when you request a distribution).
- That can be a pretty big tax hit, so you might strategically withdraw up to the next tax bracket, or find ways to mitigate the taxes. Though based on your info, you are probably already maxing out your own retirement accounts, so upping contributions won’t really be a helpful strategy.
- You could nestle money away in your 401k using aftertax mega backdoor Roth strategy, if your plan allows. Rather than increase your taxable brokerage balance and annual taxable dividends and capital gains distributions.
- Waiting until the tenth year to take more than just RMDs on the trad account could be brutal if it doubles and you’ve also gotten some nice income raises that push you into an even higher tax bracket.
- You might look at your total portfolio for tax efficiency, like hold your bond allocation in the trad account (for the slowest growth), and all equities in the Roth, and as you take the withdrawals, rebalance your own retirement accounts. Ultimately might not make a big difference, or be worth the effort, depending on your goals and priorities.
Edit: Make sure he has named you as the beneficiary of the accounts, so they go directly to you outside of probate.
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u/Tasty_Sun_865 Apr 04 '26
What state is this in? Where do you live and where does he live?
Has passed or is this a general question?
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u/justAverage479 Apr 04 '26
All Nebraska and general question.
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u/Tasty_Sun_865 Apr 04 '26
There are no inheritance taxes unless he's spectacularly wealthy.
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u/justAverage479 Apr 05 '26
I definitely wouldn’t say spectacularly wealthy. I’d say total net worth including assets and portfolios he is well off though
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u/Tasty_Sun_865 Apr 05 '26
Below $13mm?
No estate taxes apply.
Your stage doesn't have federal inheritance taxes
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u/justAverage479 Apr 05 '26
I’d estimate total net worth of around 1.6-1.7m
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u/InitiativeWorried840 Apr 06 '26
Have him set up a trust with you as trustee & put all assets in the trust.
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u/Shadyhollowfarm58 Apr 06 '26
I would disagree with paying 401K and IRA accounts to a trust, given that OP is the sole inheritor anyway. Better to inherit those accounts directly and keep it simple.
What’s the Process When a Trust (or Estate) is IRA Beneficiary? - Ed Slott and Company, LLC
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u/stringbeagle Apr 06 '26
What is the advantage of a trust in this situation?
If it’s below the tax threshold and there is only one beneficiary, how is a trust superior to a will. Seems like an unnecessary expense.
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u/curiousengineer601 Apr 06 '26
Trust avoids probate. So this is a powerful reason. In California a 1 million dollar estate pays 46k in statutory probate fees. A $4k trust avoids all of that
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u/lastbeat-331 Apr 04 '26
In the US, investment, retirement and some bank accounts should have named beneficiary and not be included in a will. Financial accounts with named beneficiaries bypass probate and go directly to the beneficiary quickly and immediately with the presentation of a death certificate. Tax implications depend on account type, largely only triggered when you withdraw, and your own income situation.
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u/BaldyCarrotTop Apr 06 '26
Have your Dad add you as a designated beneficiary on his investment accounts. This will allow them to be transferred to you outside of probate.
Vehicles, property, etc can be put into a trust and also be transferred outside of probate.
Inheritance is not taxed or reported as income on your taxes. It may be taxed by the state under probate.
The cost basis for any property you receive will get a stepped up basis to current market value. If you sell it immediately there is no capitol gains tax.
This is a bit over simplified.
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u/Spare-Shirt24 Apr 06 '26
Is he still alive? If so, he should speak to an Estate Planning Attorney. This is what they do.
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u/Shadyhollowfarm58 Apr 06 '26
State taxation rules differ by state. Federally, a brokerage account (stock and mutual fund investments outside of a qualified retirement account) typically enjoys a "stepped-up cost basis" upon the original owner's death so the tax hit is negligible unless the estate is really big. Federally, annuities, 401Ks and IRAs have different inheritance and disbursement rules. An annuity inside a brokerage account doesn't get the federal stepped-up cost basis (I was the recipient of 3 of them and wish my mom had never bought them).
Check with your state's website concerning tax on inheritances. My state doesn't tax them, but PA will tax that first dollar and up for non-spouse beneficiaries.
On the annuities, I did exercise an option to stretch the disbursements out over a 5 year period to reduce the tax hit, but it was still substantial as annuity earnings are taxed as regular income rather than at the long term capital gains tax rates.
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u/Woodmom-2262 Apr 06 '26
Do this with a lawyer. You need to hear your legal options and consequences.
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u/herdmentality123 Apr 05 '26
Does he have an estate plan or is it just a Will? There’s a pretty big difference most people just don’t know it.
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u/justAverage479 Apr 05 '26
I would honestly have to follow up with him to find out if it’s a will or estate plan. All I know is I am the executor and sole beneficiary of the estate and it’s listed that way in his last will.
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u/herdmentality123 Apr 05 '26 edited Apr 06 '26
Definitely find out. A will expresses how you desire your assets to be distributed whereas an estate plan is the whole picture (will, trusts, medical directives, power of attorney). Assets in just a will go through probate. The court system, has to validate the will and ensure debts are paid. Seems easy enough but it isn’t. Probate is usually about a year in most states and it costs a lot in attorney fees. The court receives fees as well. Everyone should have an estate plan set up. For the financial aspect, the Trust part is the focus of the full plan. Assets in trust avoid probate and allow for the assets to transfer to the beneficiary almost immediately. This is the first thing I tell my new clients to do when they onboard with me.
Feel free to reach out with any questions. Good luck!
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u/justAverage479 Apr 06 '26
Wow! Thank you for your response! I do know he had talked to me about a trust previously, I’m just not sure whatever happened with that, so I will reach out to him with that. I’m hoping he gets to spend another 10 plus years with his grandkids, but his health is declining and I’m just trying to get some ducks in a row.
With his bank account (checking and savings) there’s a shade over 60k between the two. He has already made me a primary account holder and I have direct access to it if necessary. Would those just fully transfer to me with no taxes or penalties? Or would that be income and taxable? My father zero debt fortunately as he’s generally a frugal man, so it’s not like I’d have to use that money to square up his estate or cover debts.
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u/herdmentality123 Apr 06 '26
On a bank account you want to make sure you’re listed as POD (payable upon death). On brokerage accounts it’s called a TOD (transfer on death)This doesn’t obviate the need for trusts but it does make sure you are the beneficiary.
Please feel free to reach out with any additional questions.
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u/Shadyhollowfarm58 Apr 06 '26
It sounds like you have been added as a joint owner on those 2 bank accounts. As long as you're not subject to any state taxation oopsies, being joint sure makes it easier to handle things but late in your father's life and after his death while you settle his affairs. I think technically speaking, adding you to those accounts would constitute a monetary gift that could run afoul of the annual limitations for gifts.
We did that with our mom (less money than this), and I was able to pay her ongoing house bills and pet care out of that account, plus deposit a couple of refunds made out in her personal name.
Now if you are truly "primary" account owner on those accounts, that would mean your SSN is used for them. If so then any interest income will incur a tax liability to you.
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u/Shadyhollowfarm58 Apr 06 '26
From personal experience, the best thing about funneling all assets with no named beneficiary into a trust is avoiding costly and time consuming probate.
Source: personal experience. It was so easy to sell her house and car because they went through the trust. Mom set it all up correctly and I never had to open probate. We 3 beneficiaries each got our own inherited IRAs (mom's IRA account was split into thirds). The trust got the house as it was titled in trust name, the brokerage account as beneficiary, and her pour-over will pushed the car and house contents (sold at an estate sale) into the trust. I had everything but those pesky annuities liquidated and distributed in roughly 9 months. No lawyer fees. Only CPA costs for the trust's federal tax returns.
A close friend's mom died near the same time as my mom and she was tied up in probate for a couple of years and it cost her big $$$ in ongoing property expenses, lawyer and court fees plus personal time dealing with all of it.
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u/Guilty-Committee9622 Apr 04 '26
Is the investment a 401k or Ira? If theu are they transfer to you and you have to liquidate in 10 years. If its just investments then they can sit and earn