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I get lots of questions on how inherited investments are taxed. Next month, we’ll talk about taxes on retirement accounts, but this month we’ll tackle the other holdings that might pass to heirs after the death of a loved one.
One of the most common legacies to be inherited are the proceeds from a life insurance policy. Some people take out small policies meant to pay for burial expenses and others spend their lives paying premiums to provide a lump-sum inheritance to survivors. Once heirs receive a death certificate from the funeral home (usually about a week after someone’s passing), they can reach out to the insurance company(ies) and request a payout on the insurance contract. Monies, then, can be received in a very timely manner. Life insurance policy proceeds are tax-free to beneficiaries.
Also tax-free are cash accounts like checking, savings, money market accounts and certificates of deposit (CDs).
Under current tax law, stocks, bonds and mutual funds in a brokerage investment account get a “step-up” at death. If Morgan spent $1,000 in 2010 to buy 10 shares of a cellphone company at $100 per share and she wanted to sell them in 2023 at $150 per share, her cost basis is $1000 (amount she invested), her sales proceeds are $1,500 and her profit is $500 (the amount on which she will pay capital gains taxes). If Morgan gets hit by a bus on 01/01/23 before she decides to sell her cellphone stock, her heirs get a “step-up” on the stock. This means that the value of the investment on the date of death becomes the new cost basis for the heir. If the value on Morgan’s date of death is $150 per share for a total of $1,500 and her heirs sell the 10 shares while the stock is still trading at $150 per share, there will be no taxes owed.
Annuities are a type of investment offered by an insurance company. Annuities do not have a “step-up”. If annuities grow in value from the time an investor invests and then the annuity is inherited, the new heir or heirs will pay capital gains tax on the amount of the growth since the day the investor purchased it. Capital gains tax is lower than the ordinary tax rates citizens pay on wages and most other types of income, but is still a tax. Some heirs have difficulty coming up with the cash to pay the inherited annuity tax owed soon after the death of a loved one. Please keep this is mind if you are presented with the opportunity to purchase an annuity to leave as a legacy to your loved ones. Individual circumstances will dictate, but it might make more sense to invest in an insurance policy or an investment that will receive a “step-up”. Your investment professional can help guide you.
Huiskamp Collins Investments, LLC is a different kind of financial firm! We empower women’s financial futures and serve women and the people they love. Heidi Huiskamp Collins has been a financial professional for 20 years and is licensed as a fiduciary, always putting the needs and interests of her clients above her own. Heidi’s passion is searching out individual stocks and bonds for her clients. Her 5-6 hours a day of research and analysis is what she does for fun! She would love to sit down with you over a beverage and have a complimentary conversation about the people and goals that matter to you. Please reach out to Riane, Chief Operating Officer, at 563-949-4705 or riane@hhcinvestments.net.
Securities offered through J.W. Cole Financial, Inc. (JWC) Member FINRA/SIPC. Advisory services offered through J.W. Cole Advisors, Inc. (JWCA). Huiskamp Collins Investments, LLC and JWC/JWCA are unaffiliated entities.
