If your loved one has died and you're the beneficiary of a payable on death or similar type of account, then you can take over ownership of the account simply by presenting the account owner's original death certificate to the bank or investment company where the account is held. But once you've collected the proceeds, you'll need to understand the tax and other consequences of inheriting the account.
Income Tax Consequences
As the beneficiary of a payable on death (POD) or transfer on death (TOD) account, an "in trust for" (ITF) account, or a Totten Trust, you will inherit the account free and clear of any income tax consequences to you.
Instead, if the account owner's other assets don't require probate, then any income earned by the POD, TOD or ITF account or Totten Trust prior to you taking over ownership of the account will be reported on the account owner's final income tax return.
If the account owner's other assets are subject to probate, then any income earned by the POD, TOD or ITF account or the Totten Trust prior to you taking over ownership of the account will be divided between the account owner's final income tax return for income earned prior to death and the account owner's estate income tax return for income earned after death.
Estate and Inheritance Tax Consequences
If the account owner's estate is subject to federal or state estate or inheritance taxes and the account owner had a Last Will and Testament or Revocable Living Trust, then provisions contained in the Last Will or Living Trust will dictate whether or not you'll be required to contribute to the payment of the estate or inheritance tax bill.
If the account owner's estate is subject to federal or state estate or inheritance taxes and the account owner didn't have a Last Will and Testament or Revocable Living Trust, then the laws of the state where the account owner died will dictate whether or not you'll be required to contribute to the payment of the estate or inheritance tax bill.
Do You Have to Pay Any of the Account Owner's Final Bills?
A common question that comes up when the owner of a POD, TOD or ITF account or a Totten Trust dies owing a significant amount of debt is whether the beneficiary will be required to use any of the account proceeds to pay off the outstanding debt. The answer is NO.
