But, when the property is distributed, the beneficiary begins paying income tax on the income the property generates from the date it is turned over to the beneficiary. The proceeds from a life insurance policy are not subject to income tax. However, this should not be confused with the estate tax. Life insurance, unless properly handled, is subject to the estate and gift tax and may be a part of the decedent's gross estate. When you sell an asset, you pay tax on the difference between your basis and the net sales price.
Basis is generally the purchase price less any prior claimed depreciation.
When an asset is given to you, you take your donor's basis. On the other hand, if you inherit an asset, you get a step up in basis to date of death value. There is no step up in basis for deferred compensation. The IRA is a part of the gross estate. Also, as the IRA is withdrawn by the daughter, she must pay income tax as well.