What is the best way to protect a sizeable inheritance (8-10MM) as an only child from one parent? Is there any structure available now? How to avoid having to empty it in 10 years and pay huge taxes yearly?
Inheritance strategy
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Last: 2 days ago by Horse with No Name
Estate lawyer.
Charismatic Megafauna
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Estate tax exemption is currently 15M. Are you the parent or the child?
You will want to look into trusts. Contact an estate attorney and get a financial advisor.
I assume you are referring to an Inherited Roth when you mention the 10 year rule....
I assume you are referring to an Inherited Roth when you mention the 10 year rule....
I am child and all of it is in a IRAs- some roth but mostly taxable IRA.
I know estate tax we are good but income taxes would be out of control
I know estate tax we are good but income taxes would be out of control
Timeline? Are you married/do you trust your spouse? Do you have kids?
That's a VERY sizeable chunk so first and foremost congratulations on a parent that has done very well and put the family in a position to have "problems" that few can only dream of. Always keep that blessing in mind.
If the timeline is sufficient, and this won't be a panacea, but it can be a start. Look into annual gift limits. The current limit is $19,000 annually (this creeps up much like IRA and 401(k) limits). This is from any one person to as many recipients as they wish.
So your parent can start taking the distributions above their annual needs and giving you the max each year. They can give your spouse the max each year. They could give each of your kids (into a trust, custodial account, or 529, etc) the max every year.
If you're looking at 10 years of runway this could potentially get a decent portion of the inheritance passed down ahead of their passing.
The tax man will come on those distributions as some point one way or another. We don't like the tax man but that's the way it is. If the parent can or is willing to eat some of that burden then that's an option.
Thinking out loud... could some of it be put towards your kids college where they could sell out and take the distributions when they're in the broke college kid tax bracket?
Again, congrats on your families financial success and the blessing that this responsibility brings
That's a VERY sizeable chunk so first and foremost congratulations on a parent that has done very well and put the family in a position to have "problems" that few can only dream of. Always keep that blessing in mind.
If the timeline is sufficient, and this won't be a panacea, but it can be a start. Look into annual gift limits. The current limit is $19,000 annually (this creeps up much like IRA and 401(k) limits). This is from any one person to as many recipients as they wish.
So your parent can start taking the distributions above their annual needs and giving you the max each year. They can give your spouse the max each year. They could give each of your kids (into a trust, custodial account, or 529, etc) the max every year.
If you're looking at 10 years of runway this could potentially get a decent portion of the inheritance passed down ahead of their passing.
The tax man will come on those distributions as some point one way or another. We don't like the tax man but that's the way it is. If the parent can or is willing to eat some of that burden then that's an option.
Thinking out loud... could some of it be put towards your kids college where they could sell out and take the distributions when they're in the broke college kid tax bracket?
Again, congrats on your families financial success and the blessing that this responsibility brings
I'd be comparing the parent's tax bracket to yours and asking how much of that IRA we can get taxed at 22%, 24%, etc. while the parent is still alive, instead of forcing you to recognize millions over 10 years.
As mentioned earlier, y'all need to visit with an estate lawyer/ planner. It's been a few years, but an elderly relative had this Ira issue and was retired with modest income in retirement. So he would withdraw annually up to a certain tax bracket as the heirs were in a higher tax bracket at that time and in the foreseeable future. Wound up being a good strategy as he was able to pay home health care help out of pocket when they were eventually needed. Did not like paying some tax at the time of course, but it saved paying much more later for the elderly and the heirs.
Better to pay 15 percent than 30, and having liquid funds to pay home health care if you are able is better than being in a nursing home.
Better to pay 15 percent than 30, and having liquid funds to pay home health care if you are able is better than being in a nursing home.
Convert as much as you can now, into a Roth, while your parent is alive. Defintely max out the 22% and 24% brackets. How old is your parent? Are they in good health?
Kenneth_2003 said:
Timeline? Are you married/do you trust your spouse? Do you have kids?
That's a VERY sizeable chunk so first and foremost congratulations on a parent that has done very well and put the family in a position to have "problems" that few can only dream of. Always keep that blessing in mind.
If the timeline is sufficient, and this won't be a panacea, but it can be a start. Look into annual gift limits. The current limit is $19,000 annually (this creeps up much like IRA and 401(k) limits). This is from any one person to as many recipients as they wish.
So your parent can start taking the distributions above their annual needs and giving you the max each year. They can give your spouse the max each year. They could give each of your kids (into a trust, custodial account, or 529, etc) the max every year.
If you're looking at 10 years of runway this could potentially get a decent portion of the inheritance passed down ahead of their passing.
The tax man will come on those distributions as some point one way or another. We don't like the tax man but that's the way it is. If the parent can or is willing to eat some of that burden then that's an option.
Thinking out loud... could some of it be put towards your kids college where they could sell out and take the distributions when they're in the broke college kid tax bracket?
Again, congrats on your families financial success and the blessing that this responsibility brings
Parent is 80 but in great health. Hopefully lives another 20 years and this isnt an issue anytime soon.
Parent has not shown any interest in gifts of cash like that, has been generous with helping grand kids with college 529s, cars and house downpayments but has shown no interest in really "drawing down" the accounts. I think they would rather pay for vacations, meals etc than just handing out cash.
Parent had a large income tax bill last year from RMDS.
AggieInHouston said:
I'd be comparing the parent's tax bracket to yours and asking how much of that IRA we can get taxed at 22%, 24%, etc. while the parent is still alive, instead of forcing you to recognize millions over 10 years.
Both Tax brackets sit just over the 32% bracket.
Mas89 said:
As mentioned earlier, y'all need to visit with an estate lawyer/ planner. It's been a few years, but an elderly relative had this Ira issue and was retired with modest income in retirement. So he would withdraw annually up to a certain tax bracket as the heirs were in a higher tax bracket at that time and in the foreseeable future. Wound up being a good strategy as he was able to pay home health care help out of pocket when they were eventually needed. Did not like paying some tax at the time of course, but it saved paying much more later for the elderly and the heirs.
Better to pay 15 percent than 30, and having liquid funds to pay home health care if you are able is better than being in a nursing home.
Agreed need to talk to an estate planner but Parent is a little sensitive on the subject and I dont want to make it seem like I am wishing anything to happen, I just want parents legacy not to be wasted and be as smart about it as can possibly be.
Im not quite sure exactly but Parent has stated must withdraw certain amount to "cash" which I guess sits in a savings account of some kind.
VaterAg said:
Convert as much as you can now, into a Roth, while your parent is alive. Defintely max out the 22% and 24% brackets. How old is your parent? Are they in good health?
Ive brought this up before and I know Parent has done some but not as aggressive as possible. Parent is in great health, looks 60 instead of 80. I am pretty sure last year was in the 32% bracket already.
Edit just looked, AGI in 25 was right at 500k
Its just an uncomfortable subject that neither one of us really want to talk about. I have my own money and certainly dont want to be ever come across as greedy I just want to be smart about it. At this point if something were to happen I almost think I would have to retire early with the additional income that would be coming in with the 10 year surge. I am close to 50.
I would love for parent to invest in a lake property or ranch, something that would leave a lasting legacy and something that can be enjoyed now.
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I'm pretty sure her willingness to participate in this exercise is key
Jack Pearson said:VaterAg said:
Convert as much as you can now, into a Roth, while your parent is alive. Defintely max out the 22% and 24% brackets. How old is your parent? Are they in good health?
Ive brought this up before and I know Parent has done some but not as aggressive as possible. Parent is in great health, looks 60 instead of 80. I am pretty sure last year was in the 32% bracket already.
Edit just looked, AGI in 25 was right at 500k
Its just an uncomfortable subject that neither one of us really want to talk about. I have my own money and certainly dont want to be ever come across as greedy I just want to be smart about it. At this point if something were to happen I almost think I would have to retire early with the additional income that would be coming in with the 10 year surge. I am close to 50.
I would love for parent to invest in a lake property or ranch, something that would leave a lasting legacy and something that can be enjoyed now.
You took the words right out of my mouth as I was reading this reply. I read the first bold and legacy was the word that immediately came to mind.
Jack Pearson said:VaterAg said:
Convert as much as you can now, into a Roth, while your parent is alive. Defintely max out the 22% and 24% brackets. How old is your parent? Are they in good health?
Ive brought this up before and I know Parent has done some but not as aggressive as possible. Parent is in great health, looks 60 instead of 80. I am pretty sure last year was in the 32% bracket already.
Edit just looked, AGI in 25 was right at 500k
Its just an uncomfortable subject that neither one of us really want to talk about. I have my own money and certainly dont want to be ever come across as greedy I just want to be smart about it. At this point if something were to happen I almost think I would have to retire early with the additional income that would be coming in with the 10 year surge. I am close to 50.
I would love for parent to invest in a lake property or ranch, something that would leave a lasting legacy and something that can be enjoyed now.
The lake house or ranch idea certainly sounds great and would be enjoyed by many. Financially though, you're still facing the same issue as parent would first have to take distributions from IRA (and pay taxes on) to fund it. With an AGI of 500k and RMDs there is almost no wiggle room for less tax painful conversions/distributions.
But look at it this way, it's a great problem to have.
The conversation won't get easier as they get older, sorry to say that. My wife & I are dealing with/this w/her mom who is now showing signs of dementia that she didn't have a year or so ago. It's hard on all involved, and not necessarily fair to the grandkids IMO.
I have an estate attorney, don't know where you are located. Also have a FA who helped my wife w/the transfer of a small 6 figure estate a few years back into assets to help minimize the potential tax hit. The gifting is a great idea, IF you can get them to buy into it. People that age may need to see it on paper.
Good luck, that's a nice problem to have.
I have an estate attorney, don't know where you are located. Also have a FA who helped my wife w/the transfer of a small 6 figure estate a few years back into assets to help minimize the potential tax hit. The gifting is a great idea, IF you can get them to buy into it. People that age may need to see it on paper.
Good luck, that's a nice problem to have.
I read this whole post in Andy Dufresne's voice from Shawshank Redemption when he's talking to the guard on top of the roof.
Everyone is just going to recommend a trust. But wouldn't necessarily do one or at least for all of it. Talk to people who have been 2nd or 3rd generation recipients of trusts. Everyone I've talked to has had nightmare experiences with them and family members.
I would recommend a family limited partnership with you as a LP and separately as the GP. Even if you give your kids equity as a mechanism to hand down you as GP can make all decisions like cash distributions. Furthermore there are higher investment requirements for investing with a trust.
I'd also stay far far away from property in multiple family members names. At some point someone will no longer want to pay the property taxes or maintenance costs and want out. The remaining owners will be forced to come up with cash or forced to sell.
I would recommend a family limited partnership with you as a LP and separately as the GP. Even if you give your kids equity as a mechanism to hand down you as GP can make all decisions like cash distributions. Furthermore there are higher investment requirements for investing with a trust.
I'd also stay far far away from property in multiple family members names. At some point someone will no longer want to pay the property taxes or maintenance costs and want out. The remaining owners will be forced to come up with cash or forced to sell.
Charismatic Megafauna said:
Estate tax exemption is currently 15M. Are you the parent or the child?
If the inheritance is in property, is this $15M of overall value of the properties or only the equity in the property? For instance if the property is worth $20M but the bank is owed $9M for it, is this a $20M (and taxes owed on $5M) or $11M inheritance as it pertains to tax laws?
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I'm sure someone else here knows the correct answer but I can't imagine that you have to pay taxes on inherited debt, only the equity.
Texaguser17 said:
Everyone is just going to recommend a trust. But wouldn't necessarily do one or at least for all of it. Talk to people who have been 2nd or 3rd generation recipients of trusts. Everyone I've talked to has had nightmare experiences with them and family members.
I would recommend a family limited partnership with you as a LP and separately as the GP. Even if you give your kids equity as a mechanism to hand down you as GP can make all decisions like cash distributions. Furthermore there are higher investment requirements for investing with a trust.
I'd also stay far far away from property in multiple family members names. At some point someone will no longer want to pay the property taxes or maintenance costs and want out. The remaining owners will be forced to come up with cash or forced to sell.
I was wondering about something like this. Trust seems to be the most common answer.
Agreed on multiple family member property, in my mind it would be parents, then mine and then my kids but no one else would be involved.
12thMan9 said:
The conversation won't get easier as they get older, sorry to say that. My wife & I are dealing with/this w/her mom who is now showing signs of dementia that she didn't have a year or so ago. It's hard on all involved, and not necessarily fair to the grandkids IMO.
I have an estate attorney, don't know where you are located. Also have a FA who helped my wife w/the transfer of a small 6 figure estate a few years back into assets to help minimize the potential tax hit. The gifting is a great idea, IF you can get them to buy into it. People that age may need to see it on paper.
Good luck, that's a nice problem to have.
Thanks.
So is there any estate attorneys that will just discuss options with you without having to fork over $300 bucks because that is one that that has always held Parent back which I know is ridiculous. Manages their own money, does their own taxes etc.
Find someone you like, pay them the $300, then tell your parent it's free.
Charismatic Megafauna said:
I'm sure someone else here knows the correct answer but I can't imagine that you have to pay taxes on inherited debt, only the equity.
If the equity is in after tax accounts or if it is real property, then the heirs get a step up in cost basis, and thus, no taxes apply.
Jack Pearson said:12thMan9 said:
The conversation won't get easier as they get older, sorry to say that. My wife & I are dealing with/this w/her mom who is now showing signs of dementia that she didn't have a year or so ago. It's hard on all involved, and not necessarily fair to the grandkids IMO.
I have an estate attorney, don't know where you are located. Also have a FA who helped my wife w/the transfer of a small 6 figure estate a few years back into assets to help minimize the potential tax hit. The gifting is a great idea, IF you can get them to buy into it. People that age may need to see it on paper.
Good luck, that's a nice problem to have.
Thanks.
So is there any estate attorneys that will just discuss options with you without having to fork over $300 bucks because that is one that that has always held Parent back which I know is ridiculous. Manages their own money, does their own taxes etc.
With an account that large, I'd imagine the account financial company (Fidelity, Vanguard, etc) would offer complimentary estate planning advice sessions, at least on introductory basis. They probably have an advisor allocated to your Parent who can schedule a free 1-hour powwow session where you can ask all your questions and pick their brain some.
Jimmy Conway said:Charismatic Megafauna said:
Estate tax exemption is currently 15M. Are you the parent or the child?
If the inheritance is in property, is this $15M of overall value of the properties or only the equity in the property? For instance if the property is worth $20M but the bank is owed $9M for it, is this a $20M (and taxes owed on $5M) or $11M inheritance as it pertains to tax laws?
The taxable estate is net of allowable deductions and net of any debt. And prior gifts come into play as far as the $15 million exemption amount.
Our wills, trusts, estate lawyer, who I believe is very smart/good, also believes trusts are way overused and often unnecessary. They definitely have their place - but I tend to agree.
Tough call if your parent is not really interested in discussing this with you. It's not your money and you really don't have any recourse other than to gently poke them over time about making sure their financial situation is buttoned up. The good thing is that you are the only child so it sounds like you won't have to deal with other ****bird family members trying to vulture in at the last minute although you can never rule out your parent's siblings, cousins, etc.
Thankfully, my parents (and my mom specifically) being militant about finances and not wanting the government to get anything at all, if possible, brought me into the fold a few years ago once she could no longer manage it herself (she's legally blind now).
So, I'm now executor and then I rolled their stuff into ours so my FA could oversight over both ours and my parent's finances. And I'm on all the calls with them when they meet with our FA. But I'm also not looking at a windfall like you are. Our goal is to just try and manage their money to last through the end.
Thankfully, my parents (and my mom specifically) being militant about finances and not wanting the government to get anything at all, if possible, brought me into the fold a few years ago once she could no longer manage it herself (she's legally blind now).
So, I'm now executor and then I rolled their stuff into ours so my FA could oversight over both ours and my parent's finances. And I'm on all the calls with them when they meet with our FA. But I'm also not looking at a windfall like you are. Our goal is to just try and manage their money to last through the end.
MAS444 said:
Our wills, trusts, estate lawyer, who I believe is very smart/good, also believes trusts are way overused and often unnecessary. They definitely have their place - but I tend to agree.
Can you expound more on this? A trust for significant family wealth seems important to transfer wealth between generations.
What are the downsides?
I'm not a wills/probate/estates lawyer and every situation is different...but generally costs and complexity, administrative issues, questionable tax benefits in many cases, less protection than many people think...
Again, they definitely have their place, especially with very large and/or complicated estates. But there's a school of thought that they're over marketed and often used when not necessary.
Probate isn't always the villain that it's made out to be and can be much simpler/cheaper in many cases.
Again, they definitely have their place, especially with very large and/or complicated estates. But there's a school of thought that they're over marketed and often used when not necessary.
Probate isn't always the villain that it's made out to be and can be much simpler/cheaper in many cases.
There's alot more knowledgeable people so take what I say with a grain of salt. My experience in setting up stuff for my family and going through this for a few years is trusts serve as a max protection vehicle but because of that they can create problems down the line.
For example a trust is a legal entity. The kids you pass th wealth onto technically don't own any of it. The trust does. Maybe that matters to you, maybe it doesn't. But since it's not theirs they cannot decide how to pass it to their children etc. at some point there will be so many descendants with hands in the trust the returns are diminished and infighting will bound to happen.
Another factor is if the trust seeks to invest in anything that requires the invested entities to be accredited the trust requirements is 5 million vs 1 million for an individual etc.
Vs a family partnership it offers alot of the same protections with a lot more flexibility IMO.
For example a trust is a legal entity. The kids you pass th wealth onto technically don't own any of it. The trust does. Maybe that matters to you, maybe it doesn't. But since it's not theirs they cannot decide how to pass it to their children etc. at some point there will be so many descendants with hands in the trust the returns are diminished and infighting will bound to happen.
Another factor is if the trust seeks to invest in anything that requires the invested entities to be accredited the trust requirements is 5 million vs 1 million for an individual etc.
Vs a family partnership it offers alot of the same protections with a lot more flexibility IMO.
- I strongly suggest you find an Estate attorney with a Masters in Tax.
- I strongly suggest a trust to avoid probate and maintain anonymity. Also, a trust does not need to be multi-generational. Your parent has the power to construct it under their wishes/desires.
- The change in the non-spousal Inherited IRA laws during Trump's first administration really nailed the beneficiaries. One must deplete the total holdings within ten years. It appears to me, since you are an only child, the majority of the estate will pass to you. However, if the trust designates you and grandchildren, then the pie will be divided, such that the tax burden could be minimized.
- One of the posters mentioned Fidelity. They certainly will give you advice (if you are a client). In fact, they have an Attorney/Masters in Tax VP who reviewed our wills and made some strong recommendations (also pertaining to IRA's and potential tax liabilities) which we are addressing.
- Does your parent have any desire to donate to charity? Annual RMD's (a portion or the whole thing) can be donated to charitable organizations without incurring taxes.
- After visiting with Fidelity, it cost us $350 for an hour of time with an estate attorney with a masters in tax (that we found in our area). It was worth it.
- Bottom, bottom line…your parent has to agree to move in this direction. I understand the uncomfortable nature this puts on both parties. However, I could also see you paying 37% tax for several years if you do nothing. As others have said, that's a problem, but also a problem many never face.
- All of this in my opinion only. Good luck!
MAS444 said:
I'm not a wills/probate/estates lawyer and every situation is different...but generally costs and complexity, administrative issues, questionable tax benefits in many cases, less protection than many people think...
Again, they definitely have their place, especially with very large and/or complicated estates. But there's a school of thought that they're over marketed and often used when not necessary.
Probate isn't always the villain that it's made out to be and can be much simpler/cheaper in many cases.
You can avoid probate with a simple POD beneficiary designation on accounts too.
There isn't much you can do at this point. At 80 they are getting slammed with RMDs so no real Roth conversion opportunities.
You can thank Trump and the Republican Senate for the secure act 1.0
You can thank Trump and the Republican Senate for the secure act 1.0
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