Inheritance and taxes may be the single thing our clients are most confused about, and we understand why. You lost somebody, which is hard enough on its own, and now you are receiving things you may never have known existed. An account nobody mentioned. Ground you have never walked. Paperwork with your name on it and no explanation attached. What most people want at that point is not a tax seminar. They want somebody to tell them plainly what to expect. 

That is what this is. What shows up on your own tax return, what is taxable, what is tax-free, and what you should make sure you hang onto. 

If you are also the person your loved one trusted to represent their estate, that is a separate job with its own set of tasks, and we will cover it in a future article. This one is written for the person receiving. 

The short version 

One. Receiving an inheritance is not taxable. Cash, land, a house, farm ground, stocks and brokerage accounts, vehicles, personal property, life insurance proceeds. None of it goes on your return as income. There is no federal inheritance tax on the person receiving, and Montana has no estate tax and no inheritance tax at all. If estate tax were ever owed, the estate pays it before anything reaches you. It is not your bill and it does not become your bill. 

Two. Retirement money is the exception. A traditional IRA, a 401(k) or 403(b), a pension, deferred compensation, a non-qualified annuity, savings bond interest that was never reported. That money is taxable as ordinary income when it comes out, the same as it would have been for the person who owned it. The reason is simple. On that money the tax was postponed, not forgiven. Your father took a deduction when it went into the IRA, on the understanding that it would be taxed coming out. Dying does not cancel that arrangement. It only changes who writes the check. 

Three. Document what everything was worth on the date of death. Not a note to yourself. Third-party documentation is what holds up, and there is a whole hierarchy of it further down this article, from a formal appraisal at the strong end to the county's assessed value at the weak end. Those values are worth more than the rest of this article put together. Land, a house, a brokerage account, machinery, cattle: almost everything outside a retirement account resets to what it was worth on that date, and that number becomes your basis for as long as you own it. Nobody sends you a statement proving it. If it does not get documented now, you will be reconstructing it years from now with worse information and fewer people around who remember. 

If those three are all you take from this, you are ahead of most people who walk through our door. 

Whose job is what 

Before the detail, one boundary worth drawing, because heirs routinely worry about things that are not theirs to worry about. 

Not your job. The deceased person's final tax return. The estate's own income tax return. Deciding whether to file a federal estate tax return. Paying the estate's debts. Deciding who gets what. The estate handles all of it, usually with an attorney, and any tax owed at that level comes out before your share does. 

Your job. Reporting income the assets generate once they are yours. Taking the required distributions from any retirement account you inherit, on schedule. Establishing and keeping the record of what things were worth on the date of death. Reporting the Schedule K-1 the estate sends you. And doing your own planning around all of it, which is the part nobody hands you a form for. 

If what you are really after is the planning side, how families structure this before a death rather than after, start with Estate and Succession Planning in the New Era, and if there is farm or ranch ground involved, From the Tractor to the Trust. 

Everything past this point is the detail 

The rest of this article comes in three parts: the tax to expect, the questions to ask, and the planning to do. It is where the nuance lives, and there is more of it than anyone needs in a single sitting. Read it now if you are the type, or leave it and come back when a decision is actually in front of you. We would rather you have it than not. 

Part One: The Tax to Expect 

The retirement accounts are the whole taxable story 

An inherited traditional IRA or 401(k) is taxable as ordinary income when it comes out, the same as it would have been for the person who owned it. No reset, no favorable rate, no exclusion. 

For most people inheriting from someone other than a spouse, the account has to be emptied by the end of the tenth year after the death. If the person had already started taking required minimum distributions, you also take a distribution during each of those ten years rather than waiting until year ten. 

Roth IRAs run on the same ten-year clock, but the money comes out tax-free. There is rarely a reason to touch an inherited Roth before year ten. If the balance between traditional and Roth money is something you are thinking about for your own accounts too, The Power of Roth Retirement Accounts is worth twenty minutes. 

A surviving spouse has options nobody else has, including rolling the account into their own IRA and treating it as their own. Which option is best depends on the ages involved. 

Everything else got a clean slate 

Almost everything outside those deferred accounts resets to fair market value as of the date of death. Ground your grandfather bought in 1961 for $80 an acre comes to you with a basis equal to what it was worth the day he died. Sell it the next year and there may be almost no gain at all. Sell it in 2046 and only the appreciation since his death is taxable. 

Receiving it is tax-free. Selling it later is a separate question with its own answer, and if a sale is anywhere on the horizon, Before You Sell Real Estate walks through how the classification of the property changes the tax. For inherited farm ground specifically, Section 1062 now allows the tax on a farmland sale to be spread over four years, even on a cash sale, which is worth knowing before you sign anything. 

A few things about the reset that surprise people: 

• Inherited property comes to you with a credited holding period of one year and a day. For land, a house, or securities that is all you need, so a sale a month after the death still gets long-term treatment. 

  
  

• That credit is not enough for cattle and horses. Breeding livestock has to clear twenty-four months to qualify for capital gain treatment, so the year and a day only gets you halfway. You add your own holding time on top of it. Sheep, hogs, and goats need twelve months, so the credit covers them from day one. 

  
  

• Market animals, feeders and culls carried for sale, are inventory rather than capital assets. Gain on those is ordinary income no matter how long anybody held them. 

  
  

• If you are a surviving spouse in Montana, only your spouse's share of jointly titled property gets stepped up, usually half. Montana is not a community property state, so your half keeps its original basis. 

Machinery and equipment come over clean 

Here is a benefit almost nobody knows about. When your father depreciated a combine down to zero, he was carrying a large ordinary income problem. Had he sold that combine for $200,000, essentially the whole $200,000 would have been depreciation recapture taxed at ordinary rates, not capital gain. 

That recapture history does not follow the equipment to you. Your basis resets to date-of-death value and the depreciation he took comes off the asset as far as you are concerned. Inherit the same combine at a $200,000 value, sell it for $200,000, and there is no gain and no recapture. The same holds for farm buildings, grain bins, and purchased breeding stock. 

You also get to start a fresh depreciation schedule on that stepped-up basis, which is real deduction money if you are continuing to farm. 

Worth knowing, because it cuts the other way: none of this happens with a gift. Equipment handed down during someone's lifetime carries the giver's basis and recapture exposure right along with it. That is a conversation for the generation still farming rather than for you, and Giving While You're Living covers that side of it. 

Part Two: The Questions to Ask 

Most of the messes we untangle come down to documents that existed once and were never handed to the person who needed them. Ask the personal representative, the trustee, or the attorney for these while the file is still open. It is a reasonable request and they are used to hearing it. 

• Several certified copies of the death certificate, and the exact date of death 

  
  

• Date-of-death statements for every account coming to you 

  
  

• Any appraisal or valuation already obtained, so you are not paying to have it done twice 

  
  

• The beneficiary designation form for any retirement account you are inheriting 

  
  

• A Schedule K-1 for every year the estate or trust operated, including its final year. Do not file your own return until you have it. 

  
  

• If a federal estate tax return was filed, a complete copy 

  
  

That last one needs a note only because people worry about it. Most estates never file a federal estate tax return. The exemption is high enough that the large majority of what we see is nowhere close, and the absence of one is not a problem or a red flag. But if a return was filed, the values reported on it are binding on you. You cannot claim a higher basis later than what the estate reported, so get the copy. 

One question to ask the custodian, not the estate. For any brokerage account transferred to you, ask in writing that cost basis be reset to date-of-death value, then check the next statement to confirm they actually did it. Custodians get this wrong regularly, and whatever basis they have on file is what shows up on your 1099-B years later. Correcting it after the fact is a much harder conversation than getting it right now. While you are in there, save a full account statement dated the day of the death, not the month-end statement. 

Part Three: The Planning to Do 

Decide which ten years you want to pay tax in 

This is the single largest decision most heirs have, and almost nobody realizes it is a decision at all. 

With an inherited retirement account, the question is not whether you pay tax. It is when. Someone who takes $400,000 out in a single December pays a far larger bill than someone who spreads it across a decade and fills up the lower brackets each year. If you are close to retirement, or you have a low-income year coming, or you are on Medicare and watching your premiums, the sequencing is worth real money. It is worth modeling before the first distribution, not after. 

Two things that cannot be undone if you get them wrong: 

• If you are not the surviving spouse, do not take a check and do not move the money into your own IRA. It has to go directly from one custodian to the other, into an account titled as an inherited IRA. A distribution taken by mistake is fully taxable and cannot be put back. 

  
  

• If the person died after they had started RMDs and had not yet taken that year's distribution, somebody has to take it. That falls to the beneficiaries. 

  
  

A surviving spouse's election is usually a one-way door too. Ask before you sign the custodian's form. 

Establish what things were worth, at a cost that makes sense 

The step-up is worth nothing at all if you cannot prove the number. Nobody sends you a basis statement. Establishing it falls to you, and the cheapest time is right now while the records and the people who remember still exist. 

This is where we get accused of drumming up work, so let us be plain. Nobody should spend $4,000 proving the value of a $15,000 asset. Nobody should be relying on a website printout for 900 acres of dryland wheat ground either. There is a hierarchy of evidence, and the right rung depends on two questions: how much tax is riding on the number, and how likely the property is to be sold. 

Strongest to weakest, and all of these are legitimate in the right place. 

A formal appraisal. The strongest evidence there is. It holds up under examination and it settles arguments between heirs. It also costs the most. Residential work in the valley runs several hundred to around a thousand dollars, and a large ag or ranch appraisal runs several thousand and up. This is where to spend money on farm and ranch ground, timber, commercial property, anything the family intends to hold for years, and anything where several heirs might see the number differently later. Ground you will hold another twenty years is exactly where a $3,000 appraisal is the cheapest insurance you will ever buy. 

A broker's price opinion or market analysis. Costs less than an appraisal, sometimes considerably less. It is dated, written by a licensed professional, and rests on comparable sales. That is real evidence, just not as strong as an appraisal. For a house in an established neighborhood with plenty of comparable sales, this is often the right call and we will tell you so rather than send you to an appraiser out of habit. 

The sale itself, if it happens soon. If the property sells within roughly a year of the death in an arm's length transaction, the closing price is strong evidence of date-of-death value on its own. Keep the settlement statement and the listing history. 

A published guide. Kelley Blue Book, NADA, recent auction results, dealer listings for comparable equipment. The right tool for vehicles, trailers, ordinary machinery, and most personal property. Print the page with the date showing and put it in the file. 

The county assessed value. Far down this ladder, but it belongs on it. It is a dated third-party government record, which is more than most people can produce, and it is retrievable. The problem is not that it is unreliable, it is that it is systematically low. Montana assesses agricultural ground on productivity rather than market value, so the assessed figure on ranch land is often a small fraction of what the ground is actually worth. Residential assessed values run closer to market but still lag behind it. Using the tax notice means starting with an understated basis on purpose, which costs you at sale. 

That said, there are two situations where it is honestly the best available answer. One is when someone does not want to pay for an appraisal or a market analysis and needs something documentable rather than nothing. The other is when the death was twenty or thirty years ago and nobody documented anything at the time. In that case the historical assessed value may be the only record anyone can still pull, and a low documented number beats an undocumented guess. We would rather help you use it with your eyes wide open than have you show up at closing with no basis at all. 

Your own written estimate. Weakest, but not worthless. Date it, say what you based it on, and sign it. For household goods and personal effects this is usually all anyone needs. 

A rough test for which rung to stand on: if a twenty percent error in the value would change the eventual tax bill by more than a few thousand dollars, buy the appraisal. 

On going without. You are allowed to skip documentation. If you have no intention of ever selling and the cost genuinely bothers you, that is a decision you can make. We just want you making it with your eyes open, because it is a real trade and not a free one. 

What you give up is the ability to prove your number later. Plans change. Property that was never going to be sold gets sold, heirs need to settle up with each other, a divorce or a health event forces a decision nobody planned on. When that day comes, establishing date-of-death value is your job, and you will be doing it years after the fact with worse information and fewer people around who remember. A qualified appraiser can still do a retrospective appraisal as of the date of death, but it costs more than it would have, it carries less weight, and it gets harder every year that goes by. Eventually you are down to the county's old assessed value and whatever anybody still has in a drawer. 

So the question was never whether you have to document it. It is how much you are willing to risk against what it costs today. 

Call before you move anything 

If you have inherited something and you are not sure what it means, call. Before you sign a distribution form, before you cash a check, before you list a property. A half-hour conversation now is worth more than any amount of cleanup later and it costs a good deal less. 

And if you are still in the early weeks of this and none of it feels manageable yet, that is normal. Almost nothing here has to be decided this month. 

This article is general information, not advice on your particular situation. Every family's facts are different.