What are the tax implications of inheriting an IRA, stock and mutual funds?

1 answer | Last updated: Nov 23, 2016
Barry yoder asked...

My father was recently diagnosed with terminal cancer. In preparing to manage the finances for my mother once he passes, I've come across two items that I've questioned: 1) His IRA accounts are solely in his name. My understanding is that IRA accounts can only be in the name of one individual. Assuming (I will determine) my mother is listed as the beneficiary of these accounts, what are the implications for her upon his death (inheritance tax, income tax, and so on)? 2) My father assisted my younger sister to open stock and mutual fund accounts. Because she is disabled, he opened the accounts in both names. If these accounts are "joint tenacy with right of surviorship" upon his death, she becomes the sole owner of the accounts, correct? What are the tax implications of inheriting an IRA, stock and mutual funds (inheritance tax, income tax, and so on)?


Expert Answers

Barbara Steinberg is the CEO and founder of BLS Eldercare Financial Solutions, which specializes in helping families pay for long-term care for their loved ones. A registered financial gerontologist, she speaks regularly on the topic of paying for long-term care and is a financial expert for Caring.com.

To your first question: when your father passes away, your mother will have three options for his IRA. The first option is for your mother to roll over your father's IRA into her IRA, either an existing IRA or a new one. The advantage is that the "Required Minimum Withdrawals" will be based on your mother's age. If she chooses, she can "stretch" the distribution of her IRA over two lifetimes by naming a beneficiary who is at least 10 years younger than her. The second option is to transfer your father's IRA into an "Inherited IRA Beneficiary Distribution Account." The timing of the Required Minimum Withdrawals will depend on whether your father will be over or under age 70 1/2 at the time of his death. If he is under 70 1/2, your mother can delay the distributions until she turns 70 1/2. The third option is for your mother to disclaim, i.e. refuse, the inherited IRA so it will pass to the next beneficiary. Whoever is the ultimate beneficiary will pay ordinary income taxes on all pretax contributions and earnings in the year they are distributed. Since this is a married couple, there are no inheritance tax consequences.

To your second question: since your sister's accounts are titled as "joint tenancy with right of survivorship" upon your father's death they will be treated for tax purposes as if each tenant owns half. As the survivor, your sister will become the owner of the entire account. Your father's half will receive a "step up in basis." This means that the property will pass to your sister at the fair market value at the time of his death. If and when your sister sells the property, the cost basis for calculating capital gains on half of the property will be the stepped up basis. Depending on the state's law and the size of the estate, there may be an inheritance tax. Since your sister is disabled, it may be prudent to establish a trust for her benefit. The trustee can manage the accounts for her when your father passes on.