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Christopher Phelps
Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2710
Experience:  CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
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Inheritance Taxes

Neither the U.S. nor New York has an inheritance tax. Thus, any inheritance you receive as a beneficiary is tax-free to you (assuming relevant estate taxes have been paid). In limited instances the U.S. government may attach beneficiary inheritances where the estate were subject to U.S. estate tax and failed to pay prior to distribution to the heirs.

However, should you ever inherit a tax-deferred account such as a 401(k) or pension account, any distributions you take would be subject to income tax the same as if the decedent owner took a distribution. This is called income in respect of a decedent (IRD). If you inherit tax-deferred accounts seek competent tax counsel as you have significant choices to make regarding titling of the accounts and required distributions. Of course any investment income generated by the inherited funds (once you receive it) would be subject to normal taxation.

Except for items of IRD (see above) your cost basis in inherited property will generally be equal to the fair market value as of the date of the decedent's death (unless an estate tax return is filed and the executor chooses an alternate valuation date). Accordingly, if you sell the property you will only be taxed on post-death appreciation. The heirs are automatically presumed to have held any inherited property more then one year, thus entitling you to long-term capital gains rates if you sell. Thus, the maximum Federal tax rate on gains on the sale of inherited property is15% (5% if the gain would otherwise be taxed in the 10% or 15% regular tax brackets).

Estate Taxes

Depending on the the fair market value of the remaining estate as of the date of death and when the taxable gifts were made there may or may not be an estate tax return filing requirement. Also, just because there is a filing requirement does not necessarily mean there is an estate tax liability. Also, the New York estate tax is tied to the Federal Credit for State Death Taxes, so the amount depends on how much State Death Tax credit you qualify for under Federal estate tax rules.

An estate of an individual who died on or after January 1, 2004, and who was a resident or citizen of the United States at the time of death and was either domiciled in New York or had an estate that includes real or tangible personal property having an actual situs in New York State, must file a New York State estate tax return (Form ET-706 if the the gross estate, plus federal adjusted taxable gifts (i.e. taxable gifts made within three years of the date of death) exceeds $1,000,000.

A Federal estate tax return is required if the fair market value of the gross estate, plus adjusted taxable gifts and specific exemption, exceeds $1,500,000 for decedents dying in 2005 ($2,000,000 for decedents dying in 2006). A U.S. federal estate tax return required to be attached to the New York estate tax return if a Federal estate tax return is being filed.

Both returns are required to be filed within nine months of death.

Decedent & Estate Income Tax Return Filing Requirements

The executor has the responsibility to make sure the decedents final tax return is completed and filed in a timely manner. Such a return should be prepared recognizing all income and deductible expenses incurred up to the date of death.

For income received and deductible expenses incurred subsequent to the decedent's death, the executrix needs to file an estate income tax return. The estate of the decedent is a separate legal entity that has its own income tax filing requirements. The estate is treated much like an individual for tax purposes (i.e. tax rates, deductions, etc.) with a few exceptions.

I strongly recommend you engage competent tax counsel in order to help you comply with these requirements and to determine whether your Father's estate has a Federal and New York estate tax return filing requirement.

Because it is impossible for me to identify and consider ALL the relevant facts, this advice is not intended or written to be used for the purpose of avoiding penalties, and cannot be used for that purpose.

Customer: replied 11 years ago.


To the extent your father made taxable gifts within the last three years of his death, they will be added to his taxable estate. Gifts made prior to three years from the date of death are not includible in the estate for estate tax calculation purposes. Accordingly, if your father has assets worth $500,000 at his death and has made $600,000 in gifts within the last three years, he will have a NY estate tax return filing requirement, but not a Federal estate tax return filing requirement. He may or may not owe estate tax depending on what deductions are available (i.e. mortgage debt, final expenses, legal fees, etc.).

Because it is impossible for me to identify and consider ALL the relevant facts, this advice is not intended or written to be used for the purpose of avoiding penalties, and cannot be used for that purpose.

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