Inheriting IRA money

[cowman]

If you set it up right with an inherited IRA, you only owe taxes on what gets taken out. Leave it in and let it ride or clean it out incrementally to split the income between tax years to avoid getting into the higher brackets.

Also, unless I’m mistaken I thought they did away with estate tax in the latest bill.

 

[denverpilot]

Years ago, I worked with a widow, whose husband died without a will, so the house went to her and her two young at the time children. Well the children knew they owned the house too, out voted her, and sold the house from under her so they could buy new cars.

Sick. But it happens. Reminds me of some of the stories of Karen’s dad who was a Probate attorney.

He did say late in life after he retired that Colorado had done some good things simplifying Probate here, but that it hurt his old firm’s business and eventually caused it to close down. He didn’t get paid all of his “retirement” money from the firm in the end, after working when Probate was hard and people really needed an attorney to wade in that water.

So every once in a while government decides something needs to be easier I guess. One of the rare times I’ve seen that happen to an entire specialty in law.

Even with the simplifications it’s still a mountain of paperwork when someone dies.

 

[PaulS]

Feeling upset about paying taxes on inherited money? How about paying taxes on the home you broke your butt to keep when the real estate bubble burst, but you needed to move anyway. We scacrificed quite a bit to come up with the down on the new house. Then, did the leg work to manage the old house as a rental. Now that values are up, taxes owed on the gain of the sale of the old house are huge. Feels like I'm getting robbed - TWICE!

It's income Kenny, it gets taxed, better than the alternative, being upside down when you sell.

 

[Clip4]

It may be a fact of life, but the fact that the government is just getting fatter by the minute makes getting upset about paying taxes legitimate.

What country do you live in?

The number of people employed by the federal govt has declined 400,000 (12%) since 1990. The average federal tax paid, before the Trump tax cuts, has declined 18% since 1981. The top tax rates have fallen as well as the corporate tax collected.

 

[Everskyward]

It may be a fact of life, but the fact that the government is just getting fatter by the minute makes getting upset about paying taxes legitimate.

What country do you live in?

The number of people employed by the federal govt has declined 400,000 (12%) since 1990. The average federal tax paid, before the Trump tax cuts, has declined 18% since 1981. The top tax rates have fallen as well as the corporate tax collected.

Don't go there. This thread is about how to handle taxes when someone dies. If it turns into a political brawl about taxes and government, we will lock the thread.

 

[bflynn]

Yes, but that is not inheritance. That is the deceased paying taxes, proving that between the two, taxes is still more certain than death.

You win. I bow before your superior knowledge of semantics.

 

[PaulS]

You win. I bow before your superior knowledge of semantics.

Whatever bflynn, I just reread my posts, no where did I imply that inheritances are treated as income to the beneficiary where they must pay income tax on it, I thought I was pretty clear that the estate needed to pay its taxes, it can be done by the estate or passed to the beneficiaries to pay.

 

[coloradobluesky]

Be careful what lawyer you pick to help handle an estate. Lots of ways for lawyers to, lets be kind, unfairly enrich themselves by taking from the estate. Best option is a bank trust department estate lawyer. They will charge more, but because the bank is looking over their shoulder, its harder to be, shall we say, greedy. Try and get some references and recommendations from friends and accountants, other family members. Dont hand over the contents of a safety deposit box to a lawyer. In fact if he asks you to do that, find another lawyer. Inspect the contents and get an appraisal yes, hand over to a lawyer, no.

 

[cowman]

After having dealt with an estate myself and been privy to what went on with another one with a family member I find the whole process pretty disgusting. Someone writes out what they want done in their will and gets the document properly notarized and whatnot.... then when they actually die it seems like a coin toss as to whether or not their wishes actually are carried out.

It should be straightforward, you should be able to just fill out a couple of forms and be done- maybe get a lawyers help with that much of it but it should be something that can be taken care of in an afternoon or two not a long drawn out thing..... and don't even get me started on the taxation, administration fees, and other BS that you have to put up with.

 

[FormerHangie]

After having dealt with an estate myself and been privy to what went on with another one with a family member I find the whole process pretty disgusting. Someone writes out what they want done in their will and gets the document properly notarized and whatnot.... then when they actually die it seems like a coin toss as to whether or not their wishes actually are carried out.

It should be straightforward, you should be able to just fill out a couple of forms and be done- maybe get a lawyers help with that much of it but it should be something that can be taken care of in an afternoon or two not a long drawn out thing..... and don't even get me started on the taxation, administration fees, and other BS that you have to put up with.

Your estate is going to be as complicated as your life was. I'm married to my first and only wife, I have two daughters, one who is about to turn 18 and the other which is a minor. If I kick the bucket tomorrow, about the only thing that won't automatically become my wife's is my car, and all she'd have to do is to sign the title as the executor to sell it. We're joint owners with rights of survivorship on the house and one brokerage account. She's the beneficiary of my retirement accounts, and while I do have a couple of brokerage accounts that are in my name only, there's a Transfer on Death order on each of them. There's practically nothing for her to do.

If you've been married four times, have been divorced three of them, have minor children with two different wives and one illegitimate one, well, that's a different story. The courts have a strong interest in seeing that widows (or widowers) and orphans are taken care of, and they may well go to court to demand a forced share.

Of course, if you're broke, things get real easy.

 

[denverpilot]

Of course, if you're broke, things get real easy.

Oh if only that were true. Might have been back in the day when businesses didn’t offer credit to broke people to not only run their lives (until it all crashes and bankruptcy proceedings start) but also their businesses.

 

[TCABM]

Going through this right now with my mother’s estate. Two qualified variable annuities, a no-qualified variable annuity, traditional IRA, life insurance, brokerage, and cash accounts. Thankfully, no real property.

All annuities held by different companies, but with the same agent. All products have beneficiaries or transfer on death notices filed in accordance with her wishes in the will and as understood by us.

Each beneficiary will set up an inherited (beneficiary) IRA with the correct registration required for a direct transfer of in kind assets. This will both divide and consolidate three products/accounts so that each beneficiary will receive their shares from the 3 products in one account funded by mutual fund shares.

RMDs will have to be taken in 2019, as the 2018 d has already been paid.

The non-qualified annuity will be split four ways with each beneficiary able to choose between lump sum (tax due on gains above the premium), a possible 1035 exchange to a new annuity, or by annuitization. Looks like everyone is optioning for the lump sum method for that account.

The brokerage account we’re still working on, but is TOD to the beneficiaries. Expecting that all will elect in kind asset transfer if possible.

Cash accounts will be held for final expenses, then TOD to the beneficiaries.

While these options incur tax liability, it appears to minimize each beneficiary’s exposure as much as possible.

Thankfully, we’ve got 2 beneficiaries in the industry and we’ve all known the agent for 20+ years.

My mother put her money where her mouth was and annually held a business meeting with all of us, her attorney and advisor/agent to ensure her wishes would be executed and all would know of the impacts.

We’re kind of open about that in our family and I know that’s unusual.

Lesson learned: if your leaving assets to others, be open and transparent about it.

 

[coloradobluesky]

Distribute it before you die else the lawyers take it

 

[bflynn]

What lawyers?

My mother's ownership was stocks, annuity, her house, cash, a land investment partnership and a small amount of valuable property. But in none of this do I need a lawyer to tell me how to deal with it. We sweep everything to cash, pay all the debts and then pay out the rest to the children. I'll probably take the land partnership as part of my share. The annuity is paid as life insurance and the house passes outside the estate by state law.

I'll spend more on her taxes than I will on an attorney.

 

[flyingron]

Nothing should be surprising. Inherited IRAs with small exception behave like your own IRA. A "standard" IRA you pay taxes on when you withdraw and a penalty if you're not old enough yet. If you are old enough, you have to take the minimum distributions out of the inherited IRA as well. This is all because nobody paid taxes on that income when it went in. The IRS forgives a few tax items when people die but this is not one of them.

But you're still coming out ahead.

Now, if they put the money into a non-tax deferred account like a regular brokerage (or even a Roth), the money gets distributed without tax (provided you haven't hit the multi-million dollar estate tax trigger). You even get a stepped-up basis on the securities in the account to the date of their death (avoid capital gains tax).

 

[Rushie]

You’re catching on.

However there’s another way to deal with real estate by placing people on the title before someone is gone. Has ups and downs.

There’s other ways to do this in trusts as well.

My mother's lawyer suggested we do this, put her house into a trust naming her and her four living children as co-trustees (if that's the right term). Only mom has the right to kick any or all of the rest of us out of the trust or revoke the trust, although each of us has the right to leave it if we so desire. The lawyer said when Mom dies, the house ownership does not change, it remains in the trust, and so remains out of the estate. This will avoid probate. The rest of her assets are TOD or jointly held, other than the contents of the house, so hopefully her estate will be easy to settle. Well there is her car but I think we are going to transfer that to my sister pretty soon. The hard part is going to be deciding what to do with the house, but being in the trust, the decisions must be unanimous. We'll either sell and split the money, or one or more of us will buy out the others, or I guess we have the option of keeping it as rental property. Another benefit of the trust is we won't have any time pressure to make a decision.

The lawyer said he advises his clients to do this based on the projected cost of probate. When it starts to exceed his fee to form the trust, that's when it makes sense to consider it. But there were also some law changes in her state that make it advantageous to have the trust. It protects the asset better from certain threats.

Both our Moms are in their 90s and still going strong, and hubby and I are the respective executors. We dread dealing with this but know it's coming...

 

[flyingron]

The advantage of inheriting property (either via probate or via a revocable trust) is that you get the stepped up basis to the time of your mother's death.
Anything you are given while the she is still alive, comes with her (presumably low) basis, which means your taxes will be higher when you do sell it.
Understand that "being on the title" isn't like some sort of club membership. When you add someone to title you are IRREVOCABLY GIVING them some amount of ownership in the property, unless you are careful under your state's law with regard to survivorship rights, it doesn't mean they will automatically get the rest of the property. Further, they can break even a joint tenancy and then if they die first, the property goes to their heirs (whoever that may be) not to the other (original) owner of the property.