Inheritance options

[Unregistered]

I'm trying to help a client determine her options with inherited assets:
1) Stock with FMV $250,000.
Client's basis = $250,000, so sell and have cash with no tax consequences or keep and pay capital gain above $250,000 if sold in future
2) House with FMV of $200,000.
Sell and have cash with no tax consequences.
Convert to rental - would she be able to depreciate the $200,000?
Hold as investment and pay capital gains above $200,000 when sold
3) Traditional IRA = $300,000
Deceased mom was taking RMD's, so my client must take RMD's? Based on client's life or does she continue with mom's RMD's?
If client takes all as cash now, does the entire amount become taxable income? Any 10% penalty?
4) Life insurance proceeds of $175,000
Take as cash with no tax consequences.

Do I have these right and are there any other options or strategies that anyone has seen out there?

Thanks for your help.

[Joe Btfsplk]

Too many questions

You have asked too many questions for each to be answered individually. The basic rule for inherited property is that it is valued at the fair market value at the time of inheritance.
If sold immediately, there would be no gain or loss. If sold later there could be a gain or loss.

If a single message contains a dozen questions, it would be necessary to print the questions before attempting to answer them since few people can remember all of the questions and most of us couldn't answer more than 11 out of 12 questions, so, in order to conceal our ignorance of the 12th question we would be reluctant to answer the other 11.

[Kram BergGold]

Some answers

You are fine on 1 and 4.

2) House with FMV of $200,000.
Sell and have cash with no tax consequences.
Convert to rental - would she be able to depreciate the $200,000?
Hold as investment and pay capital gains above $200,000 when sold

ANSWER-Yes except can't depreciate the land value.

3) Traditional IRA = $300,000
Deceased mom was taking RMD's, so my client must take RMD's? Based on client's life or does she continue with mom's RMD's?
ANSWER- see TTB page 13-24
If client takes all as cash now, does the entire amount become taxable income?

ANSWER- yes, unless you can document non deductible contributions. Remember if estate taxes were paid by the decedent the beni gets a Schedule A non 2% deduction.

Any 10% penalty?
Answer- no, the 1099 should be coded 4.

[Roland Slugg]

Think "basis"

You're on the right track but may be confusing yourself with the "either...or" options you mentioned.

Re Q1: The basis is $250k ... period. "Sell now and have no tax consequences" is not correct. If sold now, there would still be a LT capital gain or loss, unless a security happened to sell (net of commission and other fees) for exactly what its basis was.

Re Q2: Same as per Q1 above, except that if depreciated a reasonable allocation to land must be made, as Kram BergGold mentioned above.

Re Q3: Daughter may spread her inherited IRA distribution over her own life expectancy based on the Single-Life Table and her age on her birthday in the calendar year after her mother died. She may take distributions higher than the minimum, of course, but if she takes less, an excise tax/penalty will apply. This distribution, btw, doesn't work quite the same as the RMD table for a living person. Instead, the original divisor is simply reduced by 1 each subsequent year, before being divided into the account's beginning-of-the-year balance. Kram BergGold's reference to TTB page 13-24 probably has this same information, but you may not have access to that. (See Regs 1.401(a)(9)-9, Q&A 1, and Regs 1.401(a)(9)-5, Q&As 1 & 5)

Re Q4: The basic policy payout is non-taxable, but there is often interest added for all or part of the time between the DOD and the payout. That interest is taxable and should be reported on a 1099-INT form at year-end.

I don't agree that you should have posted all 4 (not 12) of your questions separately, since they are all related in nature. It's a simple matter for anyone replying to scroll down and review your original post during the composition of a reply.

[BOB W]

New tax Law

Doesn't the new tax law allow a "rollover" for IRA for a non-spouse. Date of death may be an issue here.
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Added:

New Law. Effective for distributions after December 31, 2006, benefits of a beneficiary other than a surviving spouse may be transferred directly to an IRA. The IRA is treated as an inherited IRA of the nonspouse beneficiary. Thus, for example, distributions from the inherited IRA are subject to the distribution rules applicable to beneficiaries. The provision applies to amounts payable to a beneficiary under a qualified retirement plan, governmental section 457 plan, or a tax-sheltered annuity. To the extent provided by regulations, this new rule applies to benefits payable to a trust maintained for a designated beneficiary to the same extent it applies to the beneficiary.

[Roland Slugg]

Yes, but ....

Doesn't the new tax law allow a "rollover" for IRA for a non-spouse.

You're referring, I assume, to the "Pension Protection Act of 2006," and yes, Sec. 829 of that new law does allow trustee-to-trustee transfers to separate, rollover IRAs effective for distributions made after 2006. The new law, however, doesn't change the timing of future distributions ... at least I have seen no such changes. Perhaps you or someone else more familiar with that new law than I am can clarify this.

The old rules, btw, already allow benes to partition a decedent's IRA into two or more separate accounts, which would be a good thing to do in most cases where there are two or more benes of one IRA.