Hello,
My under 18 daughter was a beneficiary for her uncle's savings account. Her uncle was married and had kids of his own. He passed away unexpectedly and obviously never changed his beneficiaries to his wife or kids. The funds will be distributed to my daughter. Does she need to report it as income? And, if she wants to gift the money to the family to pay for expenses is there any tax implications for her that she needs to follow?
Thank you,
Dale, Minnesota
Dear Dale,
My condolences for the sudden loss of your daughter’s uncle. Uncles can hold a whimsical place inside the hearts of their nieces and nephews. My sister and I were fortunate to have uncles that taught us the important stuff in life - how to survive a tickle monster and how to play cards late into a summer night. I hope your daughter has fond memories of her uncle to draw on for comfort.
First, let’s discuss the savings account your daughter inherited. Whether someone pays tax on property they inherit will depend on the type of asset received. For instance, a beneficiary who inherits a decedent’s (person who passed away) non-interest-bearing checking account will not have to pay tax on the cash they receive. However, if a beneficiary inherits a decedent’s traditional IRA account and the decedent only made tax-deductible contributions, then the distributions the beneficiary receives would be taxable. Since your daughter inherited her uncle’s savings account, your daughter will not be assessed tax on the money within the savings account. However, any interest that accrued from the date of her uncle’s passing until the date she received the funds would be taxable to your daughter. Here is an example.
Being a bachelor all his days, Jack considered his niece, Lorna, the daughter he always wanted. When Jack passed away, Lorna was surprised to learn that she was the beneficiary of his savings account. Because it took several months for the savings account to be distributed, $45 in interest accrued in the account. Lorna received a total of $120,045. Lorna will report the $45 of interest income on her income tax return. The remaining $120,000 is not taxable.
Since your daughter is under age 18, any unearned income she receives may be subject to the kiddie tax. The IRS treats interest income as unearned income. Under the kiddie tax rules, children under 18 and dependent children aged 18 or between the ages of 19-23 whose unearned income is over $2,300 are subject to kiddie tax and pay tax at their parent’s tax rate. If the child does not have any earned income, then their parents can elect to add the child’s unearned income to their return instead of the child filing their own return.
Please note that kiddie tax rules can be complex and additional information about the kiddie tax can be found on the following IRS webpage:
IRS Topic No. 553, Tax on a Child’s Investment and Other Unearned Income (Kiddie Tax). Please note, again, that only the interest on the savings account is subject to tax under the kiddie tax rules, as in our example.
If your daughter decides to gift a portion of the funds to her aunt and cousins, she may have gift tax reporting requirements, depending on how much she gifts to each person. For federal income tax purposes, the person gifting the property, whether it be cash, real estate, collectibles, etc., bears the gift tax responsibilities. Taxpayers may gift a limited amount every year to a person without having to report the gift to the IRS. This amount is known as the annual gift exclusion. For 2023, the annual gift exclusion amount is $17,000. The annual gift exclusion applies to the total of all gifts given to a person for the year. For example, your daughter may gift her aunt $17,000 and each of her cousins $17,000 without having to report the gift to the IRS. However, if your daughter gifts her aunt and cousins $17,000 each and then buys each of them a gift for their birthday, your daughter will need to file a gift reporting return, even if each birthday gifts were under $25. Gifts are reported on
Form 709, United State Gift (and Generation-Skipping Transfer) Tax Return. Taxpayers are allowed to gift a certain amount in their lifetime without paying tax on the gift. The lifetime gift exclusion is combined with a taxpayer’s estate exclusion. For 2023, the gift and estate exclusion is $12,920,000.
Certain gifts do not count towards the annual gift exclusion. Medical expenses paid directly to a doctor, dentist, hospital, etc. on behalf of another person are not included in the annual gift exclusion. Additionally, tuition paid directly to an educational institution on behalf of someone else is not included in the annual gift exclusion. Keep in mind that only tuition amounts qualify. Here is an example.
After years of training, Molly won the 2022 Marvelous Marbles Championship. Along with all the marbles, Molly won $50,000. Not wanting the cash to burn a hole in her Kate Spade handbag, Molly bought a used car for her sister, Myra, for $15,000. A few weeks later, Myra fell and twisted her arm. Not having health insurance, Myra’s bill to urgent care totaled $3,000. Molly came to the rescue and paid Myra’s medical bill directly to the urgent care. The rest of the year, Molly gifted Myra a top, book, and new sneakers that totaled $350. Since Molly paid Myra’s medical bill directly to the urgent care, the total gifts that counted towards the 2022 annual gift exclusion was $15,350. Since the total gift amount was under the 2022 gift exclusion of $16,000, Molly was not required to file Form 709 for 2022. Had she given the money for the urgent care bill directly to Myra, Molly would have needed to file Form 709.
Sometimes, beneficiaries turn down or disclaim inheritances. The reasons why a person may disclaim an inheritance are broad. Reasons can include avoiding significant tax consequences or wanting to pass along the inheritance to another relative. If specific conditions are met, a person may disclaim an inheritance. The rules for disclaiming an inheritance may differ from state to state, but the basic federal rules for disclaiming an inheritance include:
- The disclaimer must be complete and irrevocable,
- It must be in writing, identify the property being disclaimed, and be signed by the disclaimant (person who is disclaiming the property) or by their legal representative,
- The disclaimant must not have accepted any interest in the property beforehand,
- The disclaimer must be made no later than 9 months after the decedent’s date of death.
- If the beneficiary is a minor at the time they inherit the property, then they will have to wait until they become a legal adult to disclaim the property. Once the beneficiary reaches age 21, they have 9 months to disclaim the property.
Disclaimants are not permitted to assign the disclaimed property to someone of their choosing. Once a beneficiary disclaims an inheritance, the executor, trustee, or court will transfer the property to the next beneficiary in line according to the decedent’s will or trust. If there is no will, trust, or other estate plan, then the property will follow the state’s intestacy laws. Basically, state intestacy laws dictate how a decedent’s estate is distributed among their heirs. Once the property is disclaimed, the decision cannot be revoked. Therefore, the decision to disclaim property should be carefully considered, and getting the advice of an experienced estate attorney is
strongly advisable.
Your daughter has a generous heart and great parents watching out for any tax implications associated with receiving her late uncle’s savings account and gifting any of the inheritance to her aunt and cousins. I hope the information above is helpful.
Wishing you fond family memories and many happy returns,
Jean Lee Scherkey, EA