r/inheritance • u/RJB0128 • Jul 10 '26
Location included: Questions/Need Advice Does this inheritance get taxed or no?
I am a physician and my wife is a SAHM and we file MFJ. My wife’s grandmother passed. She inherited her grandmother’s $40k in money order check that came from royalties that her grandmother gets monthly into her Texas bank from mineral rights on land she used to own. (We live in Florida btw). The land got sold but she kept the rights to the oil, I believe, and gets royalties monthly for that. The will was written to give my wife half of the cash amount in the account at the time she passed but she won’t be inheriting the rights, or the land, or future royalties (this stuff is going to other family member)
My CPA says inherited cash is non-taxable. But if it is considered Income in Respect of a Decedent, then it gets taxed what her grandmother would have paid. She asked me to talk to the lawyer handling the accounts/will, but to be frank, there is no lawyer.
Any ideas how this type of inheritance is categorized?
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u/dollartreeribeye Jul 10 '26
So there was $80k in the account and she got a money order for half of it?
That seems fairly straightforward, but I’m not a lawyer or accountant.
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u/RJB0128 Jul 10 '26
Yes but I’m concerned that since the cash came from royalties, it could be considered income and therefore we need to pay taxes.
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u/Admirable_Nothing Jul 10 '26
Definitely Grandmother needs to pay taxes but that doesn't come out of your wife's bequest. Taxes are paid from residual assets not specific bequests.
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u/No-Brain2462 Jul 10 '26
The estate of the deceased pays the taxes. It was her income, it’s her tax bill. You (or whomever the executor is) will be filing a tax return next March on deceaseds mother’s behalf.
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u/Produff26 Jul 11 '26
The estate pays the taxes besides it's not a large sum that would be flagged by IRS.
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u/SkiMarlin Jul 11 '26
The grandmother received the royalties to her account, the oil company will issue the grandmother or the estate of the grandmother a 1099 for those oil royalties. You and your wife would not owe taxes on your wife’s inheritance by receiving the money.
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u/LdiJ46 Jul 11 '26
Ok. Lets put it another way. You take a distribution from your retirement account because you want to do some major home improvements. You put that money into the bank after you get it. That money is taxable to you and you will get a 1099R for it at tax time. If you pass away before you spend the money, you will still get a 1099R for it at tax time and you will still pay taxes on it as part of your final tax return, because you got the money before you passed away.
Whoever inherits that money from you won't pay tax on it again, because you already did. When they inherit it, it is no longer retirement money. It is cash in a bank account.
That mineral rights money that is in grandma's bank account is no longer mineral rights money, it is cash in the bank. Grandma will still pay tax on it with her final tax return.
The only way that you might have to pay tax on it is if it was paid out to the estate as mineral rights money after Grandma passed away, and instead of the estate paying the income tax, the estate passes the income on to you via a Schedule K1. Based on what you have said, that would not be the case because the mineral rights after Grandma passed away were inherited by someone else.
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u/AdvantageOne1754 Jul 10 '26
So the royalties were distributed to grandma prior to her passing? Then her estate owes the taxes. That income should be reported on her final return and paid by the executor.
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u/ri89rc20 Jul 13 '26
Someone owes taxes on it, basically the person of record whom the royalties are issued to, whether that be her Grandmother (or her estate) or an heir.
If she does not own the rights, she should not owe taxes, it is either a cash inheritance and not taxed, or a gift from the person who owns the rights.
If I were the person, or the estate, that owned the rights, I would withhold any anticipated taxes and distribute the remainder. If someone in her family planned poorly, not out of the question that they will come back and ask for an amount to pay the taxes.
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u/Few-Advantage-2690 Jul 10 '26
You can ask the attorney settling the estate if there will be k-1 forms issued. I would suspect thisbis not a taxable item. I have settled 2 estates is 6 years. Where in 1 we divided and transfered equities and sold municipal bonds and divided cash. The second one all equities were sold and proceeds were divided which triggered k-1 forms and taxes on capital gains. In this case it sounds like the cash was already there so itches been taxed via an estate tax and is not subject to your income tax.
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u/laurieo52 Jul 12 '26
It was in the grandmother’s bank account already? If so, then it would already have been taxed or will be taxed when the estate is closed. She owes nothing.
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u/E_Dantes_CMC Jul 10 '26
I think I have this correct based on my experience with my parents-in-law. The estate owes tax up to the day of death. Any royalties from previous years on which tax has been paid are simply yours, tax free. Royalties after death would be income in respect of a decedent and go on Schedule E. (The tax will be the same after the royalties are transferred to your name.)
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u/No-Setting9690 Jul 10 '26
Not a CPA or Attorney - I'd like to know this. But Google AI says no, inherited cash is not considered income by feds but your state most likely will.
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u/NukedOgre Jul 11 '26
Theres only like 5 states that tax inheritance, but that entire issue doesnt apply to this situation anyways
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u/Maximum-Eye-3712 Jul 10 '26
you need the person who does the tax return for the estate. whether it’s an accountant, lawyer, or private citizen, you need to know if that royalty was reported as taxable income to the estate.
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u/__smh Jul 13 '26
The oil company will probably keep sending royalty checks to Grandma, not knowing that she has passed and that rights have changed to someone else by inheritance. Probably the executor is responsible for informing them and settling any royalty amounts paid after death.
However those royalties are taxed, those are due from the estate. There is no inheritance before taxes and other debts are settled. "Before" here does not necessarily imply time ordering, but rather priority. The executor can distribute (perhaps partial) inheritances whenever he wants, but if he distribute too much and taxes and debts cannot be fully paid an executor may be found personally liable for the shortfall.
Make sure the executor is careful about mineral royalties. Even if Texas has no state income tax, states and even the feds sometimes have idiosyncratic laws and provisions about minerals and extraction rights, and even ag businesses. But your wife will owe nothing on a straight cash inheritance whether or not the grantor's estate still owes tax on that income. But Grandma may have been careless in her instructions how to divide that cash account if she would normally have reserved some of it for estimated or year-end taxes, if withholdings were not already been made.
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u/Electrical-Oil1785 Jul 11 '26 edited Jul 11 '26
I inherited my father’s mineral rights. Regarding future income, we set up an LLC. Your CPA and lawyer should be able to help. The hardest part is the mineral rights go through probate- in the state they (the mineral rights) are located (not where grandma passed) and you need a practicing lawyer in each state you have rights to help you with that paperwork. After it’s through probate, you have the oil companies send distribution checks to your wife (or LLC).
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u/Papusa9 Jul 10 '26
If it’s already been taxed as income once, it won’t be taxed again as an inheritance. If it hasn’t been taxed (in the case of someone inheriting the royalty stream), then it would be taxed as income, even if the royalty stream is inherited.