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Billybeau asks:

<<How come heirs do not pay income taxes on a taxable account?>>

Because the taxable account has been funded with after-tax not tax-deferred dollars. Thus, the income taxes in effect have already been paid by the decedent during his/her life. Under existing law any gains in that account don't get taxed because heirs receive that property at market value at the time of death. Unlike the tax deferred contributions and gains in qualified retirement plans, those gains are not considered income in respect of a decendent and therefore are not taxed. Why? Who knows. I guess because the Congress felt like it.

<<Also, if the mandatory minimum required distribution from a traditional IRA was funding an investment for the heirs, would the new investment be put in the heirs name to avoid paying income taxes again on the returns that would be received?>>

No. Just look at it as if you take an MRD because you must. You pay the income taxes due and then invest what's left because you don't need the money. Then you die. The account goes to your heirs not as a gift but as a bequest. Their basis becomes the market value at the time you died. They can sell that day and not be subject to income taxes. OTOH, had you opened that account in their name initially, you made a gift to them (and lost control of the money in your lifetime) at that time. Their basis is whatever you paid for the investment. They then pay tax on any gain over that basis. Suppose they sell that account on the day you die? Instead of getting all the money tax-free, they will owe taxes based on the gain from the date you purchased that investment for them. Why pay those extra taxes or lose control of the cash during your lifetime when you don't have to?

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