The Blatt Watch by Peter Blatt: Tax on Inherited Money and how my dog Jack teaches me a new lesson on how to deal with inheriting money

From the desk of Peter Blatt, J.D., LL.M. 

My dog Jack, a 2-year old golden retriever, finally is mellowing out. He loves everybody. Yesterday while walking him, he did not try to jump and lick one of my neighbors.

Usually his tail starts waging and it makes his whole body shake with excitement when he sees someone who was nice to him. As dog owners, we discourage this level of friendliness in our pets.

Last week, one of my clients passed away. She left a large amount of money to her sole daughter. As always, I do not disclose client information in these Blatt Watches. Her daughter and I have worked for over a year discussing how she will handle her new found inheritance. The first question she had is – “do I have to pay taxes on the inheritance?” She received stock owned in a revocable living trust and also investments inside of an IRA. The stocks inside of the trust are not taxable to the daughter. The current rules allow the beneficiary of a trust to step up to fair market value the basis for inherited stock. For example, if she inherited Apple stock currently valued at say $120 per share and the mother paid $90 per share, then the daughter’s new basis in the stock would be fair market value at the date of the mothers death, so it would be the $120 per share. When the daughter turns around and sells the shares, she would only need to pay tax if the stock rose above the $120 mark. Alternatively, the stock inside of the IRA will be 100% taxable to the daughter. In fact, any monies distributed from the IRA will be subject to income tax.

One planning idea is for the daughter to stretch her inherited IRA over her lifetime and that of her children. The best way for the daughter to stretch the IRA over multiple lifetimes is for the mother to leave the IRA in trust. The mother in this case, did leave the beneficiary of the IRA as her revocable living trust. This also provides asset protection (and divorce protection) such that the IRA is not touchable by lawsuits.

As a pet parent, I always think how much fun it is to be with Jack. However, I am also concerned about how he makes it out and about. This is the same for those who are planning on how we are leaving our marks on the world.