Estates and Trusts

Updated for Tax Year 2017


Did you receive a payment or other property from an estate or trust during the year? If so, here's what you need to know about how it affects your taxes

I am a beneficiary of my father's estate. I received a cash bequest of $50,000. Do I have to pay tax on it?

No, the cash your father left you in his will is tax-free.

My uncle left me $10,000 worth of stock. Is that taxable?

You don't owe tax when you inherit the stock. You might or might not owe tax when you sell the stock.

When you inherit stock, your "tax basis" in the securities—that is, the value you use to determine your tax gain or loss—is generally the value of the stock on the date of your uncle's death as noted in any estate or inheritance records. So you would owe capital gains tax only on the amount of any appreciation after your uncle's death. If the stock falls in value before you sell it, you would have a tax-saving capital loss.

I heard that all inheritances are tax-free. Is that correct?

In a word, no. Cash, stock and real estate are not taxed as income when you inherit them, but you could have taxable gains when you sell the stock or real estate—depending on the circumstances. Some other assets come with a tax string attached—you're taxed on part or all of the value, just like the original owner would have been if he or she had lived. This rule comes into play for assets that have what's called "income in respect of a decedent."

Common examples of assets of this type are savings bonds, annuities, IRAs and other tax-favored retirement plan accounts such as 401(k) accounts. If you inherit savings bonds, for example, you'll owe tax on all interest that accrued during the life of the previous owner. If you inherit an annuity, the same portion of each payment will be taxable or tax-free as was true for the original owner. This same rule applies if you are the beneficiary of a traditional IRA, as discussed later.

I inherited some EE Savings Bonds from my mother's estate. Are the bonds fully taxable?

The principal on the bonds is tax-free, but you will owe income tax on some or all of the accrued interest.

If your mother was like most taxpayers and did not pay tax on the interest as it accrued each year, the executor of her estate can elect to have the estate pay income tax on the interest earned before your mother's death. If so, that wipes out your tax liability for that interest when you cash in the bonds.

On interest that accrues after her death, you have a choice of paying tax each year on the interest or postponing the tax bill until you cash in the bonds. If your mother's estate doesn't pay income tax on the interest, you have the same choice for all of the accrued interest on the bonds: Pay tax now or postpone the bill until you cash in the bonds.

If your mother paid tax each year as the interest accrued on the bonds, you only need to report the interest earned after her death.

My father died in 2017 at age 68. I was named as the beneficiary of his IRA. Is this a tax-free inheritance?

It depends. If it's a Roth IRA, the inheritance is federal-income-tax-free if the account was opened more than five years before you take any withdrawals.  If it's a traditional IRA, however, you will usually owe income tax as you withdraw money from the account. You have two choices on how to take withdrawals:

  • Begin taking annual withdrawals over your life expectancy by December 31 of the year after your father’s death (December 31, 2018 in this case), or
  • Clean out the account by the end of the fifth year after the year of his death (December 31, 2022 in this case)

If you elect to use the life-expectancy method, you can stretch out the required withdrawals over a number of years  and leave what's left in the account at your death to your heirs, who would then owe tax as they withdraw the money.

My spouse died in 2017 at age 68 and I was the beneficiary of his traditional IRA. What are my options?

You have the same two withdrawal choices we just noted, plus a third option  that's only available to a beneficiary who is the spouse of the deceased IRA owner.

Under the third option,  you can elect to treat the IRA as your own IRA by rolling the money over to an existing IRA in your name or by re-titling the IRA to show you as the account owner (rather than the account beneficiary). By doing so, you won’t have to begin taking mandatory annual withdrawals from the IRA  until after you reach age 70½.

I inherited my mother's traditional IRA. Do I have to pay tax on the full amount I receive each year from the account?

Actually, when you inherit an IRA, there's an easily overlooked deduction.

If the estate was large enough to be subject to federal estate tax,you can deduct the portion of the federal estate tax attributable to the IRA.

In addition, you don’t have to pay tax on the portion of withdrawals attributable to nondeductible contributions that your mother made to the IRA (if any).

Here's an example:

Say you inherited a $50,000 IRA when your mother died in 2017, which, because it was included in your mother's taxable estate, boosted the estate tax bill by $22,500. Although you have to pay federal income tax as you pull the money out of the IRA, you also get an income tax deduction for that $22,500.

If you pulled the entire $50,000 out in 2017, you get the full deduction on your 2017 return. If you withdrew just $5,000 (one-tenth of the account), you deduct 10% of the estate tax bill attributable to the IRA. That’s $2,250 in this example.

This miscellaneous deduction for federal estate tax on "income in respect of a decedent" is taken on line 28 of Schedule A. It is not subject to the 2% rule that limits the deduction of most other miscellaneous expenses.

I set up a trust for my son. Do I have to file a tax return for the trust?

You must file a tax return for the trust depending on the type of trust established or if it is not required to distribute all of its income to your son each year, or if its gross income is $600 or more.

I received a form called a 1041 (K-1) for a trust my parents set up for my siblings and me. How does it affect my taxes?

If you are the beneficiary of a trust, you are responsible for paying tax on your share of the trust income that's distributed to you. The Schedule K-1 you receive details your share of the trust's income, deductions and credits, which you report on your tax return. The K-1 tells you where to report each item. TurboTax does this for you automatically.

How are trusts taxed for income tax purposes?

Trusts have their own income tax rate schedule for income the trustee chooses to retain rather than distribute to beneficiaries. To prevent trusts from being used as tax shelters,  higher tax rates kick in at much lower income levels  than for individuals.

For example, if a trust has undistributed taxable income of more than $2,550, it is in the 25% tax bracket in 2017. By contrast, married joint-filing couples  don't reach that tax bracket until they have more than $75,900 of taxable income, and single taxpayers need more than $37,950 of taxable income to be in the 25% bracket for 2017. Trusts reach the maximum 39.6% tax bracket with undistributed taxable income of more than $12,500 in 2017, while married joint-filing couples need to have more than $470,700 of taxable income to be taxed at the highest rate in 2017 ($235,351 for individuals who use married filing separate status).

TurboTax Deluxe helps you find all the money-saving tax deductions related to your estate and trust income.

Get every deduction you deserve

TurboTax Deluxe searches more than 350 tax deductions and credits so you get your maximum refund, guaranteed.

For only $59.99*
Start for Free

Looking for more information?

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

* Important Offer Details and Disclosures

  • Try for Free/Pay When You File: TurboTax online and mobile pricing is based on your tax situation and varies by product. Absolute Zero $0 federal (forms 1040EZ/1040A) + $0 state limited time offer only available with TurboTax Free Edition; offer may change or end at any time without notice. Actual prices are determined at the time of print or e-file and are subject to change without notice. Savings and price comparisons based on anticipated price increase. Special discount offers may not be valid for mobile in-app purchases.
  • QuickBooks Self-Employed Offer with TurboTax Self-Employed and TurboTax Live for Extension Filers: To receive your complimentary subscription to QuickBooks Self-Employed through 10/31/19, you must pay for your 2017 TurboTax Self-Employed or TurboTax Live return between 4/18/18 and 10/15/18 and sign-in and access your QuickBooks Self-Employed account via mobile app or at at least twice by 12/31/18. You will have the option of renewing your QuickBooks Self-Employed subscription by 10/31/19 for another year at the then-current subscription rate. You may cancel your subscription at any time from within the QuickBooks Self-Employed billing section. See for price comparison. Offer not valid for existing QuickBooks Self-Employed subscribers already on a paid subscription.
  • Pays for itself (TurboTax Self-Employed): Estimates based on deductible business expenses calculated at the self-employment tax income rate (15.3%) for tax year 2017. Actual results will vary based on your tax situation.
  • Anytime, anywhere: Internet access required; standard data rates apply to download and use mobile app.
  • Fastest refund possible: Fastest tax refund with e-file and direct deposit; tax refund time frames will vary.
  • Pay for TurboTax out of your federal refund: A $X.XX Refund Processing Service fee applies to this payment method. Prices are subject to change without notice.
  • TurboTax Help and Support: Access to a TurboTax specialist is included with TurboTax Deluxe, Premier, Self-Employed and TurboTax Live; not included with Free Edition (but is available as an upgrade). TurboTax specialists are available to provide general customer help and support using the TurboTax product. SmartLook on-screen help is available on a PC, laptop or the TurboTax mobile app. Service, area of expertise, experience levels, wait times, hours of operation and availability vary, and are subject to restriction and change without notice.
  • Tax Advice, Expert Review and TurboTax Live: Access to tax advice and Expert Review (the ability to have a Tax Expert review and/or sign your tax return) is included with TurboTax Live or as an upgrade from another version, and available through October 15, 2018. These services are provided only by credentialed CPAs, EAs or tax attorneys. State tax advice is free. Some tax topics or situations may not be included as part of this service, which shall be determined in the tax expert’s sole discretion. In the event your return is reviewed by a tax expert and requires a significant level of tax advice or actual preparation, the tax expert may be required to sign your return as the preparer at which point they will assume primary responsibility for the preparation of your return. Expert Review [and TurboTax Live] not available on the TurboTax mobile app or when using a web browser on your mobile phone. On-screen help is available on a PC, laptop or the TurboTax mobile app. Service, area of expertise, experience levels, wait times, hours of operation and availability vary, and are subject to restriction and change without notice.
  • Tax Return Access and My Docs features: Included with TurboTax Deluxe, Premier, Self-Employed, TurboTax Live or with PLUS benefits. Access to all tax-related documents we have on file for you is available through 10/31/2019. Terms and conditions may vary and are subject to change without notice.
  • #1 best-selling tax software: Based on aggregated sales data for all tax year 2016 TurboTax products.
  • Most Popular: TurboTax Deluxe is our most popular product among TurboTax Online users with more complex tax situations.
  • CompleteCheck: Covered under the TurboTax accurate calculations and maximum refund guarantees.
  • #1 rated online tax prep provider: Based on independent comparison of the best online tax software by March 13, 2017.
  • Get tips based on your tax and credit data to help get you to where you want to be: Tax and credit data accessed upon your consent.

  • TurboTax CD/Download products: Price includes tax preparation and printing of federal tax returns and free federal e-file of up to 5 federal tax returns. Additional fees apply for e-filing state returns. E-file fees do not apply to New York state returns. Savings and price comparison based on anticipated price increase. Prices subject to change without notice.
  • Fastest refund possible: Fastest tax refund with e-file and direct deposit; tax refund time frames will vary.
  • Pay for TurboTax out of your federal refund: A $X.XX Refund Processing Service fee applies to this payment method. Prices are subject to change without notice. This benefit is available with TurboTax Federal products except TurboTax Business.
  • About our TurboTax Product Experts: Customer service and product support vary by time of year.
  • About our credentialed tax experts: Live tax advice via phone is included with Premier and Home & Business; fees apply for Basic and Deluxe customers. State tax advice is free. Service, experience levels, hours of operation and availability vary, and are subject to restriction and change without notice. Not available for TurboTax Business customers.
  • #1 best-selling tax software: Based on aggregated sales data for all tax year 2016 TurboTax products.
  • Data Import: Imports financial data from participating companies; may require a free Intuit online account. Quicken and QuickBooks import not available with TurboTax installed on a Mac. Imports from Quicken (2016 and higher) and QuickBooks Desktop (2012 and higher); both Windows only. Quicken import not available for TurboTax Business. Quicken products provided by Quicken Inc., Quicken import subject to change.