IRD Assets: Step-Up Basis, Section 691(c), and the 10-Year Rule

Income in respect of a decedent, usually shortened to IRD, is money a person earned or was owed before death but had not yet collected or reported on a tax return. When you inherit an IRD asset, you step into the decedent’s shoes for tax purposes: the income is taxable to you at ordinary rates, and unlike most inherited property, it does not get a stepped-up basis. Traditional IRAs and 401(k) accounts are the IRD assets most people encounter, but unpaid wages, deferred compensation, installment sale notes, and accrued savings bond interest all qualify.¹

What Counts as an IRD Asset

The IRS defines IRD as any gross income the decedent was entitled to receive but that was not properly includible on the decedent’s final return or any prior return.¹ The income was in the pipeline at death. The decedent did the work or made the investment that generated it, but the check hadn’t arrived, or the money was sitting in a tax-deferred account waiting to be withdrawn.

The common categories:

Traditional IRAs and 401(k) plans. These hold pre-tax contributions and tax-deferred growth, so every dollar withdrawn is ordinary income to whoever takes it out.
Unpaid wages, bonuses, and commissions earned before death but paid afterward.²
Deferred compensation owed under an arrangement the decedent had not yet collected on.
Installment sale notes. When a decedent sold property on installments, the unreported gain built into the remaining payments is IRD.³
Accrued interest on U.S. savings bonds, if the decedent used the cash method and never elected to report the interest annually.²
The untaxed gains portion of a non-qualified deferred annuity. The original cost basis is not IRD, because it was already taxed money going in.
Remaining payments representing a decedent’s distributive share or guaranteed payments in liquidation of a partnership interest.²

What Isn’t IRD

Roth IRAs sit on the other side of the line. Roth contributions are made with after-tax dollars, and qualified distributions are tax-free, so an inherited Roth generally produces no taxable income for the beneficiary. Distribution timing rules still apply, but the money comes out without an income tax bill.

Standard appreciated assets held in taxable accounts, such as stocks, real estate, and mutual funds, are also not IRD. These receive a stepped-up basis to their fair market value at the date of death, which wipes out all unrealized capital gains.⁴ A beneficiary who inherits a $500,000 stock portfolio and a $500,000 traditional IRA is inheriting two very different things from a tax perspective.

Why IRD Assets Don’t Get a Stepped-Up Basis

Most inherited property gets its cost basis reset to fair market value at death. If your parent bought stock for $50,000 and it was worth $300,000 when they died, your basis is $300,000, and you can sell the next day with no tax on the $250,000 of pre-death appreciation.

IRD is explicitly carved out of this rule. Section 1014(c) of the Internal Revenue Code says the stepped-up basis does not apply to property that represents a right to receive income in respect of a decedent.⁵ The reasoning is simple: this income was never taxed to anyone. If it also received a stepped-up basis, it would escape income taxation entirely.

The practical consequence is significant. A $500,000 traditional IRA is not really worth $500,000 to you. After federal income taxes at ordinary rates, the after-tax value could be closer to $315,000 to $370,000 depending on your bracket. Treating IRD assets as dollar-for-dollar equivalent to stepped-up assets is a mistake that cascades through every distribution decision.

Who Pays the Tax, and When

Three rules govern IRD taxation: who reports it, what kind of income it is, and when it becomes taxable.

If the estate collects the IRD, for example by cashing out an inherited account, the income is reported on the estate’s fiduciary income tax return, Form 1041.⁶ If the right to the income passes directly to a named beneficiary, that person reports it on their individual return. The tax follows the income.⁷

IRD keeps whatever tax character it would have had in the decedent’s hands. A traditional IRA distribution is ordinary income to the beneficiary, just as it would have been to the original owner. Remaining gain on an installment sale note keeps its capital gain character.⁷

The tax hits only when the IRD is actually received, sold, or otherwise disposed of. For inherited retirement accounts, only the amounts withdrawn each year are included in income, not the entire balance at once. For unpaid wages, the taxable event is payment. For installment notes, each payment triggers recognition of the built-in gain portion. One important wrinkle: if a beneficiary transfers their right to receive IRD by gift or sale, the transfer itself triggers immediate income recognition equal to the fair market value of the right transferred.²

Inherited Retirement Accounts and the 10-Year Rule

Traditional IRAs and employer retirement plans are the largest pool of IRD assets in most estates, and the rules changed sharply with the SECURE Act. Most non-spouse beneficiaries who inherit a retirement account from someone who died after December 31, 2019 must empty the entire account by the end of the tenth year following the year of the owner’s death.⁸

That window compresses what used to be a decades-long “stretch” into a much shorter period, accelerating the income tax hit. A beneficiary inheriting a $1 million traditional IRA must recognize all of it as ordinary income within ten years. Bunching that income into fewer years can push the beneficiary into higher brackets, driving the effective tax rate well above what the original owner would have paid through gradual retirement withdrawals.

A small group of “eligible designated beneficiaries” can still stretch distributions over their own life expectancy:

A surviving spouse.
A minor child of the account owner. Once the child reaches the age of majority, the 10-year clock starts.
Disabled or chronically ill individuals.
Beneficiaries not more than 10 years younger than the original account owner.⁸

Everyone else, including the adult children who are the most common IRA beneficiaries, falls under the 10-year rule. Spreading withdrawals across that decade, rather than waiting until year ten to take everything at once, is usually the single most consequential tax decision a beneficiary will make. Model several withdrawal schedules against your projected income for each year to find the approach that keeps you out of the highest brackets.

The Double Tax and the Section 691(c) Deduction

IRD assets are included in the decedent’s gross estate for federal estate tax purposes at their fair market value. When the beneficiary later collects the income, they pay income tax on the same dollars. For estates below the federal estate tax exemption, this isn’t an issue because no estate tax is owed. The federal estate tax exemption for 2025 is $13.99 million per individual, rising to approximately $15 million for 2026 after legislation made the higher exemption amounts permanent.⁹

For taxable estates, the combined bite is severe. With the top federal estate tax rate at 40% and the top income tax rate at 37%, a dollar of IRD can lose more than 60 cents to combined taxes before the beneficiary sees it.

Section 691(c) exists to soften that. When an estate actually pays federal estate tax, and some of that tax is attributable to IRD, the beneficiary who receives the IRD gets an income tax deduction for the estate tax generated by that income.⁷ This is a deduction, not a credit. It reduces taxable income rather than reducing the tax bill dollar for dollar, so a beneficiary in the 37% bracket saves 37 cents of income tax for every dollar of the deduction.

The deduction is an itemized deduction, but it is specifically excluded from the category of “miscellaneous itemized deductions.”¹⁰ That matters because miscellaneous itemized deductions are currently disallowed. The 691(c) deduction survives and remains fully deductible. If the IRD generates ordinary income, the deduction offsets that ordinary income directly. If it produces long-term capital gain, as with an installment note, the deduction reduces the gain before the capital gains tax is calculated.

The calculation compares the estate’s actual federal estate tax to a hypothetical liability with the net IRD removed from the gross estate. The difference is the estate tax attributable to the IRD, and each beneficiary claims a share proportional to the IRD they received.⁷ State estate or inheritance taxes are not part of this calculation.

Here is where claims fall apart in practice. The executor runs the numbers and tells beneficiaries their share. No specific IRS form exists for that communication. If the executor doesn’t do the math and pass it along, the deduction goes unclaimed and the beneficiary overpays. If you’ve inherited IRD from an estate that paid federal estate tax, ask the executor in writing for your 691(c) allocation before you file.

Deductions in Respect of a Decedent

Section 691(b) creates a mirror concept for expenses. Just as certain income survives death and remains taxable, certain deductions survive death and remain deductible. These “deductions in respect of a decedent” cover obligations the decedent had incurred but not yet paid, including business expenses, accrued but unpaid interest, unpaid property and other taxes, income-production expenses such as investment advisory or rental management fees, and depletion deductions on natural resource properties.⁷

The estate claims these deductions when it pays the obligation. If the estate is not responsible for the debt and a beneficiary inherits property subject to it, the beneficiary claims the deduction when they pay. The deduction is taken in the tax year the expense is actually paid, not when it accrued. These deductions also reduce the “net IRD” figure used in the 691(c) calculation.

Planning Moves That Actually Save Tax

How IRD assets are distributed can change the total tax bill substantially.

Send IRD to Charity

The single most tax-efficient move is directing IRD assets to charity. A qualified charitable organization pays no income tax, so the built-in tax liability simply disappears. If an estate plan includes both charitable and individual bequests, funding the charitable bequest with IRD assets like a traditional IRA, and giving stepped-up-basis assets like appreciated stock to individuals, preserves far more total wealth than the reverse.

Match Assets to Brackets

Among individual beneficiaries, directing a large IRD asset to someone in a lower bracket produces real savings. A beneficiary in the 12% bracket pays roughly $120,000 less in federal income tax on a $500,000 traditional IRA than a beneficiary in the 37% bracket would. This takes coordination and sometimes flexibility in how the will or trust is drafted, but the math makes it worth the effort.

Don’t Accidentally Accelerate

If the will directs the executor to liquidate an IRD asset and distribute the cash, the estate recognizes the full income and pays tax at the estate’s compressed rates, which hit the top bracket at relatively low income levels. Distributing the right to the IRD directly to the beneficiary instead lets the beneficiary control when and how much income to recognize. Nonspecific distribution language can trigger immediate recognition of the entire amount and an unexpected tax bill no one budgeted for.

The Installment Note Trap

Inherited installment sale notes carry a particular risk. Any “disposition” of the note, including gifting it to someone or canceling the remaining payments, triggers immediate recognition of all the built-in gain. A beneficiary who inherits a note with $200,000 of unreported gain and then forgives the debt as a favor to the buyer has just created a $200,000 income recognition event for themselves. The safe approach is to keep collecting payments and recognize income gradually as each one arrives.

1
eCFR. 26 CFR 1.691(a)-1 – Income in Respect of a Decedent
2
Internal Revenue Service. Publication 559 (2025), Survivors, Executors, and Administrators
3
Office of the Law Revision Counsel. 26 U.S. Code 453 – Installment Method
4
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
5
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent – Section: (c)
6
Internal Revenue Service. About Form 1041, U.S. Income Tax Return for Estates and Trusts
7
Office of the Law Revision Counsel. 26 U.S. Code 691 – Recipients of Income in Respect of Decedents
8
Internal Revenue Service. Retirement Topics – Beneficiary
9
Internal Revenue Service. What’s New – Estate and Gift Tax
10
Office of the Law Revision Counsel. 26 USC 67 – 2-Percent Floor on Miscellaneous Itemized Deductions