A client from Brooklyn called me last week. His aunt had passed away, and after a lengthy probate process, he finally received his share of her estate—a mix of cash and securities. His relief was palpable, but it was followed by a question I hear often: “Russel, do I have to report this to the IRS? Do they already know about it?”
It’s a prudent question. Yes, the IRS has several ways of knowing when assets change hands after a death. The critical point, however, is understanding who holds the primary reporting duty and what is actually being taxed. For most beneficiaries in New York, the inheritance itself is not taxable income. The tax obligations fall upon the estate, and the paper trail begins there.
The Executor’s Duty to Report
When a person passes away, their assets are gathered into a legal entity called an estate. The person in charge of managing it—either an executor named in the will or an administrator appointed by the court—has a fiduciary duty to settle the decedent’s final affairs. A significant part of that duty involves taxes.
The most direct way the IRS learns of an inheritance is through an estate tax return. For 2024, a federal estate tax return (Form 706) is required only for estates valued at more than $13.61 million. This threshold is so high that the vast majority of estates do not have a federal filing requirement.
New York, however, has its own estate tax with a much lower exemption. As of this year, the New York State exemption is $6.94 million. If a resident’s estate exceeds this amount, the executor must file a New York State estate tax return (Form ET-706). This filing creates an official record of the estate’s value and its distribution to beneficiaries. Even if no tax is ultimately due, the filing itself notifies the government of the transfer of significant wealth.
The first point of contact is not you, the beneficiary. It is the estate’s fiduciary, who is legally obligated to report the value of the assets to tax authorities if the estate meets the filing thresholds.
When Inherited Assets Generate New Income
The second way the IRS stays informed is through income reporting. While the inheritance itself—the principal—is received tax-free, any income those inherited assets generate after you receive them is taxable to you. This is a critical distinction.
Imagine you inherit a portfolio of dividend-paying stocks. The value of those stocks on the date of your aunt’s death is your inheritance. You do not report that value as income. But when those stocks pay dividends a few months later, that dividend income is yours, and it must be reported on your Form 1040. The financial institution managing the account will issue you a Form 1099-DIV, sending a copy to you and the IRS.
The same principle applies to other assets:
- Rental Property: If you inherit an apartment building, the monthly rent you collect is taxable income.
- Interest-Bearing Accounts: Interest earned on an inherited savings account or bond after the date of death is taxable to the beneficiary who receives it.
- Sale of Assets: If you sell an inherited asset like a home or stock, you may owe capital gains tax. Your cost basis is the asset’s fair market value on the date of the original owner’s death—a rule called the “step-up in basis.” You only pay tax on the appreciation that occurs after you inherit it.
The estate itself may also earn income between the date of death and the final distribution of assets. This income is reported by the executor on a Fiduciary Income Tax Return (Form 1041). When assets are finally distributed, beneficiaries receive a Schedule K-1, which details any income they must report on their personal tax returns. The IRS also receives a copy.
The Public Record of Surrogate’s Court
Finally, the legal process of administering an estate creates a public record. In New York, most estates pass through Surrogate’s Court in a process called probate. Nearly all documents filed with the court are accessible to the public.
The court file contains the petition for probate, an inventory of the estate’s assets, and a final accounting showing how every dollar was managed and distributed. This creates a detailed, legally binding paper trail of who inherited what. The executor’s duty to provide this information is a core requirement of their role, governed by laws like Article 22 of the Surrogate’s Court Procedure Act (SCPA), which outlines the rules for formal accountings.
While IRS agents do not typically sift through county court records, these documents provide a verifiable history of asset transfers. Should questions ever arise about the source of your funds during an audit, the probate record serves as definitive proof of your inheritance, distinguishing it from unreported income.
In my practice, I work with executors and beneficiaries to ensure every filing is accurate and timely. The goal is not to hide anything from the IRS—it is to report everything correctly, settling the estate efficiently so beneficiaries receive their inheritance without future tax complications. Stewardship.
If you are acting as an executor or have recently received a significant inheritance, the first prudent step is to organize the estate’s financial records. We often begin by conducting a fiduciary review to identify all state and federal tax filing requirements and their associated deadlines for the estate.
