Ask Liz Weston

Get smart with your money

Inheritance

Q&A: Taxes when inheriting a home

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Dear Liz: My sister recently passed, and I acquired her home, which I’m selling (it’s now in escrow). I was looking at state tax forms for real estate transactions, and there is nowhere to check for a person who was given a home through death. Does this mean it is taxable? I was told since it was an inheritance that it was not taxable.

Answer: Technically, you weren’t given a home. You inherited it, and you’re correct that inheritances are typically not taxable. (Only six states impose inheritance taxes, and your state, California, is not one of them.) When you inherited the home, the property received what’s known as a step-up in tax basis, so that the appreciation that occurred during your sister’s lifetime is not taxed. You would owe tax only on any appreciation that occurred since you owned the property. A tax pro can help you figure out what you might owe.

Q&A: Inheriting an IRA can get messy

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Dear Liz: My brother passed away at age 47. My mother was named beneficiary of his retirement account. We opened an inherited IRA under her name. Sadly, my mother recently passed away, and my father is the beneficiary of the account. Does my father open a regular IRA or inherited IRA? How would the title on the account be listed with my mother and brother deceased? Are they both listed?

Answer: Inheriting an inherited IRA complicates an already complex set of rules.

The regulations are different depending on whether the person inheriting is a spouse. Spouses can treat the inherited account as their own. They can leave the money where it is, make new contributions or transfer the funds to another retirement account they own. They also have more flexibility in how to take required minimum distributions from the account.

Non-spouse beneficiaries, like your mother, don’t have the option of treating the IRA as their own. They must set up a new inherited IRA and start distributions. Until this year, non-spouse beneficiaries could take distributions over their lifetimes. Now non-spouse beneficiaries are required to drain their inherited IRAs within 10 years.

How the account is titled is important, because improper titling can cause it to lose tax deferral and accelerate the tax bill. Let’s say your brother’s name was Tom Johnson and he died in March 2019, leaving his IRA to your mother, Mabel Johnson. A correct title for the new inherited IRA would be “Tom Johnson (deceased March 2019) Inherited IRA for the benefit of Mabel Johnson.”

Your family’s situation creates a hybrid of the two situations. Your dad would have an inherited spousal IRA, but his mandatory withdrawals would be based on your mother’s required minimum distributions, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

Your dad should open a new inherited IRA, Luscombe says. Assuming his name is Bill Johnson, the title of the inherited IRA should be “Tom Johnson (deceased March 2019) Inherited IRA for the benefit of Bill Johnson, successor beneficiary of Mabel Johnson.”

Tuesday’s need-to-know money news

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Today’s top story: Hard-won tips from borrowers who got student loan forgiveness. Also in the news: Steering your upside-down car loan back to safety, FAFSA mistakes that can negatively affect your financial aid, and what to do first with an inheritance.

Hard-Won Tips From Borrowers Who Got Student Loan Forgiveness
It won’t be easy.

Is Your Car Loan Upside-Down? How to Steer Back to Safety
Getting back above water.

These FAFSA mistakes can negatively affect your financial aid
FAFSA applications open on October 1st.

What to Do First With an Inheritance
Making smart decisions during a difficult time.

Q&A: Keeping a bequest from doing harm

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Dear Liz: I am leaving a good friend a bequest in my will. He receives government benefits, including disability, Supplemental Security Income and Medi-Cal (California’s version of Medicaid). I am beginning to be concerned that if he inherits the money, it could mess him up more than help him. Is there a way to leave someone like my friend a bequest without jeopardizing the various benefits they now receive?

Answer: You’ll want an attorney experienced in “special needs trusts” to help you put language into your estate plan that can help shelter this money and protect your friend’s benefits.

Your concern is well founded because a direct inheritance could cause him to lose income and health coverage. SSI and Medi-Cal are both “means tested” programs that require people to have less than $2,000 in assets. All too often, well-meaning friends and relatives leave direct bequests that have the unintended consequence of separating the recipients from vital services they need to survive.

Q&A: When family balks at paying their fair share

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Dear Liz: I inherited half a duplex from my parents. They were partners with my aunt and uncle. When alive, all parties shared expenses for the common areas. I rent out my half of the duplex while my aunt still lives in the other half. My cousins now control my aunt’s finances (she is 94 and in poor health). They refuse to reimburse me for common-area expenses such as painting the exterior (the paint was peeling, exposing the wood, and hadn’t been painted in more than 10 years) and repairing and updating the electrical panel, which had frayed and exposed wires that posed a fire hazard. The panel is on their half of the duplex but serves both units. These costs were about $15,000. What can I do? It’s not fair that I pay for everything when both owners benefit from the necessary repairs.

Answer: Your best hope may be to change your approach. Did you ask your cousins to help you pay for the repairs before you had them done, or only afterward? If they had no input into what was done or how, it’s understandable that they would balk when presented with half the bill.

Of course, they might have balked anyway, and that’s why owning property with other people can get tricky: They often don’t share your opinions about what needs to be done and how much to spend. Some prefer to defer maintenance and repairs indefinitely rather than shell out money to protect their investment. Others understand how important maintenance and repairs are but might want to do some of the work themselves to save money (although do-it-yourselfers shouldn’t attempt an electrical panel upgrade, obviously.)

So your frustration is understandable, but your options may be limited. If you can’t work something out with your cousins, your alternative may be to sell your half of the duplex, but that could require going to court to force a “partition” of the property. You should talk to an attorney familiar with the property laws in your state so you can get an idea of your options and their cost.

Q&A: Tax take on inherited house

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Dear Liz: In a recent column, you quoted an attorney saying that if an inherited home in a trust is sold for its value at the date of death, the trust won’t owe capital gains. We sold our family’s house in 2007 within a month of my mother’s death and the government took half. Fortunately it was a really valuable house in Brentwood, but what are you talking about? I must be missing something.

Answer: If the government took half, then estate taxes — rather than capital gains taxes — probably triggered that hefty bill.

When your mother died, the estate tax exemption limit was much lower — $2 million, compared with the current $11.4 million. The top federal estate tax rate then was 45%, compared with 15% for capital gains.