Any “Gotchas” to be aware of in inheritances?

Submitted by Amar Patel on Fri, 2016-10-07 02:16

Recent estate planning and life insurance analysis got me thinking that my wife and I may be able to self-insure, based on the current values of our brokerage accounts, IRAs, and 401(k)s. But it sparked a thought: am I missing any subtleties in the actual mechanics of the inheritance and retitling of assets, etc?

If I (age 38 this year) pass and everything goes to my wife (age 36 this year), I’m assuming joint accounts will be easy for her to handle, since her name’s already on the account. But what about individual checking and brokerage accounts (we use a “his, hers, and ours” financial system in our household)? In particular, I thought stock I own gets a step-up/step-down in basis when passed on to my wife, but I’ve also read that the IRS assumes my wife co-owned the equities in my individual brokerage account? That would be incorrect; I own my individual accounts individually, just as she owns her individual accounts individually. Any “surprises” in there that I need to start digging into now?

And as for the IRAs and 401(k)s, the tentative plan would be to roll the 401(k)s into the IRAs, and then let the inheriting spouse treat the IRA as if he/she owned it all along after the first spouse passes. I think this gives the greatest flexibility, right? But what if she needed to tap funds in the Roth inherited from me? Does she use my contribution/gain/loss records to show that she’s first tapping the contributions tax-free before worrying about needing to pay taxes and/or penalties on gains before turning 59.5?

Any other surprises, particularly from the “his, hers, and ours” approach to personal finances?



Submitted by Alan - IRA critic on Fri, 2016-10-07 04:24

  • There are some ramifications to taxable accounts if you live in a community property state because there is a full basis adjustment in those states for community property, whereas joint property in other states only gets a 50% step up. You are correct about individual property getting a full basis adjustment.
  • . For the retirement plans, if the surviving spouse inherits prior to age 59.5, if there is any chance she will need to tap those funds prior to 59.5 she should maintain them as inherited accounts until 59.5 and then roll them over to her own IRA. For an inherited Roth, she also needs to consider the options. If she keeps it as inherited, the account becomes qualified 5 years after you first contributed and all distributions would be tax and penalty free. But there would be RMDs eventually (when you would have reached 70.5), so she would generally roll the Roth over to her own name before that year. If she had no Roth of her own, she would have to establish a new 5 year holding period once she rolls the inherited Roth to her own name, but earnings would come out last until her own Roth became qualified.


Submitted by David Mertz on Fri, 2016-10-07 13:04

When the inherited Roth IRA is rolled or transferred to the surviving spouse’s own Roth IRA, doesn’t CFR 1.408A-6 Q&A-7(b) indicate that the surviving spouse’s new beginning date would be the earlier of the deceased spouse’s beginning date and the surviving spouse’s original beginning date (if any)?  Is that what you meant?



Submitted by Amar Patel on Fri, 2016-10-07 18:08

Maybe providing more detail would be helpful:

  • My wife and I live in Indiana, which is not a community property state as best as I can tell
  • We’ve been married since 2012 but we lived apart until mid-2013 (I was in Indiana and she was in Texas)
  • We have only an Indiana marriage certificate (married in Indiana, not Texas)
  • So based on what you’ve posted, the IRS will not automatically assume my individual assets or her individual assets are some how co-owed already, right?  And so when she inherits my taxable brokerage account, she can step-up/step-down the basis as appropriate, as anyone else might have?  Here is a link to the article that is confusing me: http://finance.zacks.com/value-inherited-stocks-3528.html
  • And as for the IRAs, it sounds like it would be best to encourage her to work with a proper financial adviser with a fiduciary duty, to determine which of the various options you describe would be best for her and the children, right?
  • But apart from that, should attempts be made by the executor to first roll any 401(k)s into IRAs before then dealing with IRA options?


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