Tax impact

[rrhascall]

We sold my mother in law's home in California in 2021.  We used the proceeds from the sale of the home to pay for her nursing home care.    When she passed away in October of 2022, there was about $30k cash left which was distributed evenly between three surviving children.  Do we need to report the remaining $30k as income?

[SusanY1]

No, the remaining cash that is distributed is not income, it's an inheritance and not subject to federal tax.  There are a handful of states that tax the receipt of inheritances, but California isn't one of them. 

If any of the surviving children live in a state with an inheritance tax, they should check the applicable state rules to ensure the total amount of their inheritance (other items in addition to this cash, if applicable) don't subject them to state tax.  The states to check include Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. 

[rrhascall]

Thanks Susan!

So,  do the proceeds of the sale of the home have to be designated as heritance as part of the will or trust?  Or, is this assumed as a result of the surviving children handling the sale and her care placement?

[SusanY1]

The proceeds from the sale of the home would have been income to your mother (likely much of it excluded as her primary residence) at the time of the sale in 2021 and won't be part of the inheritance.  

From a tax standpoint, nothing has to be designated as inheritance.  Nothing that is distributed under the will is income itself, and therefore it isn't mentioned on the tax return. The assets received could give rise to income later, however.  For example, if you deposited your $10,000 into a mutual fund, you might owe taxes later on dividends or capital gains distributions. You will also have a capital gain (or loss) upon redemption. 

Logistically, if the assets were in a trust they would need to be properly distributed from that trust by the trustee, and that will typically generate a tax document known as a "K-1".   

Assets that were subject to division based on the will (or state intestacy laws) don't have a place on the tax return, but the personal representative or executor of the estate will usually need to document how they were distributed based on the requirements of the probate court supervising the administration of the estate.  How that is required, and when, varies a great deal based on state law.    

[rrhascall]

Hi Susan,

Not sure if you are still answering questions or if someone else can confirm for me regarding my original question about cash funds remaining after my mother-in-law's passing in 2022.  After her home was sold in 2021, the cash proceeds from the sale were deposited in a trust checking account in my in-laws names.   We reported the sale on my mother-in-law's taxes for 2021.   My wife is the executor and had power of attorney.  We used the funds in the trust account to pay for her assisted living care for about 18 months until her passing.  There is about $30,000 left in the account which will be distributed evenly to 3 surviving sisters (my wife included).   My mother-in-law lived in California.  The sisters live in three different states - CA, WA and MT.

I don't believe the cash from the sale of the home were specifically designated as a gift or inheritance in her will.  It sounds like from you have already stated, that there is no tax impact on the remaining funds and the sisters do not need to report the remaining cash as income, corrrect?

[Vanessa A]

That is correct.  There are 6 states that have an inheritance tax.  Since you don't live in Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania, you are not subject to an inheritance tax.