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While inheritances are not considered income for federal tax purposes, any earnings that may come from that inheritance will be taxable, including dividends on inherited stocks or mutual funds. Your inheritance may also be subject to taxes on any gains from selling inherited property or investments.

Here are four tips for protecting an inheritance from taxation:

Alternate valuation date. Generally, the basis of property is the fair market value on the date of the owner’s death. However, an estate executor has the right to choose the alternative valuation date, which is six months following the death date. Any property sold during that six-month time period is valued as of the date of sale. Note that choosing the alternate valuation is only allowable if it will decrease both the gross amount of the estate and the estate tax liability (resulting in a larger inheritance for heirs).

Use a trust. Inheritances that pass to beneficiaries through a trust do so without having to go through probate. If you are expecting an inheritance, ask that it be set up as a revocable trust for each heir.

Pay attention to retirement account distributions. If you inherit a retirement account, you will only be taxed once distributions are taken. If you are a spouse inheriting an IRA, you can put off the distribution until you are 70 ½. However, if you are not a surviving spouse, you must take minimum distributions within a year of inheriting the IRA. In this case, consider electing the “single life” method for calculating the distribution, which will lessen the amount of taxes you will be paying.

Gifts. You may want to consider gifting a portion of your inheritance to charity, which could offset the taxable gains on your inheritance with the tax deduction you receive for your gift.

The Flanigan Law Group provides Southern California residents with personal attention for estate planning, administration and litigation legal services. When disputes between families, arise, they are very successful in resolving legal estate issues quickly and efficiently while preserving financial and emotional resources. Contact the Flanigan Law Group at 949-450-0041.