Considering taxes in beneficiary designations

[ocean view]

You sound like my FIL who is always trying to make sure that each of his kids benefit equally from his generosity (picking up the check at dinner, buying a new electronic gizmo for a grand kid etc.). We remind him that while we appreciate his gifts, we are not in competition with our siblings and no one is keeping a tally.

I would hope that when you pass your kids appreciate that there is something to inherit and they don’t get into this kind of competition. But you know your kids better than the rest of us.

[pb4uski]

No, I'm not that way at all... I do try to pick up the tab anytime we do things together (dinner, movies, etc)... but I don't keep track to try to even things out at all. I do it because we can afford it and enjoy doing things together. My grandmother sort of kept a tally with her kids and my mom and aunts and uncles who were all financially well-off sort of got a giggle out of Gram's efforts.

There will be no competition... there are only two of them (sister & younger brother) and they are very close. My incentive is just to optimize what they each receive in terms of what they can save/spend considering their different economic situations.... extended tax planning if you will.

Your picking up the check at dinner comment reminded me though.... I have 4 siblings.... and my Dad always picked up the check if we went out to dinner when he was alive despite my best efforts to pick up the check... and Mom continued to do that after Dad died. I finally decided that my efforts were futile... besides since there will be a significant inheritance once Mom passes then each time she picks up the tab 80% comes out of my sister's pockets!

Though more recently sometimes when we go out to lunch Mom doesn't object if I try to pay the bill. All is good.

[FANOFJESUS]

Quote:

Originally Posted by pb4uski Up until now, in our beneficiary designations, all accounts go to spouse or if spouse has died, to each of our 2 kids 50/50. However, one of our kids has been much more financially successful than the other and is in a much higher tax bracket so I'm wondering if I should make her the beneficiary of our Roths and the other the beneficiary of our tax-deferred accounts but fiddle with the amounts each receives so they each receive the same post-tax value. So for example, if the more successful kid receives $100 in a Roth and the other is in the 12% tax bracket (plus 5% state) then they would receive $120 in tIRAs and that $120 would be $100 after-tax. So the each receive $100 after-tax. With our current designations, if I split those hypothetical accounts 50/50, then the kid in the higher tax bracket would receive $87 after-tax and the kid in the lower tax bracket would receive $100 and Uncle Sam would receive $33 rather than $20. Just wondering.... has anyone considered their beneficiaries tax situation in making their beneficiary designations? Good idea or not? Or am I overthinking this? While it would take more work on my part because I would have to periodically reassess and adjust... if I do it right then each kid eventually receives more and Uncle Sam receives less.

Sounds like a great idea. Maybe revisit the numbers every five years so you don't have to mess with it all the time. Sure beats doing nothing.

[splitwdw]

Quote:

Originally Posted by pb4uski No, I'm not that way at all... I do try to pick up the tab anytime we do things together (dinner, movies, etc)... but I don't keep track to try to even things out at all. ...

But isn't that what your are talking about doing in your beneficiary designations?

[pb4uski]

I guess I don't view it that way. If I wanted everything to be even steven I just go 50-50. What I'm trying to do is to do have any inheritance distributed tax efficiently, just like I try to set up my portfolio to be tax-efficient.

[samclem]

Quote:

Originally Posted by pb4uski If I wanted everything to be even steven I just go 50-50. What I'm trying to do is to do have any inheritance distributed tax efficiently, just like I try to set up my portfolio to be tax-efficient.

If this is all about reducing taxes, then set up a trust and trickle out the taxable money to the child with the lowest income at a rate that you think will keep him under the tax rate of the high earner, until it runs out.

The Roth goes to whoever.

The tIRA or conventional 401k would go to the low earner/saver up to the point the dough puts him in the same/worse tax situation as the high earner/saver.

There might be a big disparity in what each receives if things are done like this, but the taxes will be minimized, which is apparently the goal.

Obviously, I wouldn't do that. I'd split it evenly before taxes, give each kid 1/2 of each type of account, and let each figure out the best way to minimize their taxes since they know best what they are earning at the time, what they anticipate they'll earn in the future, if they are going to come into a big pile of money from a spouse's relative, what the tax landscape is like at that time, and what they think it will be like in the future.

[CardsFan]

Quote:

Originally Posted by pb4uski I guess I don't view it that way. If I wanted everything to be even steven I just go 50-50. What I'm trying to do is to do have any inheritance distributed tax efficiently, just like I try to set up my portfolio to be tax-efficient.

I understand what you are trying to do, but there are so many moving parts I just don't see it necessarily working as you would like.

A lot can change, even over a short time.

Will you always know what each child is earning and their tax bracket? They may decide to do their own taxes, or hire a CPA.

Will the lower earner always be that way?

Will the lower earner decide to cash out a lump sum of the tIRA to buy a house? Start a business? There goes some of the tax advantage.

Will the laws change to preclude the use of a stretch IRA? There goes some of the tax advantage.

What if the higher earner decides to FIRE when you go, live of your Roth and tIRA dollars, letting their own stash grow, so they can leave it to their children?

It sounds like you have two level headed kids that will appreciate whatever they receive. Why run the risk of creating friction between them after you are gone? In pure dollars, your plan would give the lower earner less (before accounting for taxes). They may understand why, but will a spouse?

Just my 2 cents.

[Texas Proud]

Quote:

Originally Posted by pb4uski I guess I don't view it that way. If I wanted everything to be even steven I just go 50-50. What I'm trying to do is to do have any inheritance distributed tax efficiently, just like I try to set up my portfolio to be tax-efficient.

Even thought I would not go to this much trouble, I was trying to come up with a simple way to do it... here is my thought...


Open up a separate taxable account... invest in whatever you want... once a year when you do taxes calculate the amount of money needed to make both of them whole... make sure this account has that much in it.... leave it to the person who is supposed to get extra...

This has the benefit of leaving all other accounts alone after you get them the way you want... it also re-balances once a year... and if the one you are concerned with actually gets into a higher bracket than the other you can easily change beneficiaries to the other....