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I think I've learned just enough to ask a few more questions...
Old 03-25-2012, 07:56 AM   #1
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I think I've learned just enough to ask a few more questions...

DW is in the midst of getting an inheritance which includes IRAs, annuities and stocks/bonds (unknown composition at the moment). She may have to sell some assets to pay the estate tax. It is also unknown which of the assets may be tax deferred and/or which ones may be taxable.

1. If assets are in a tax-deferred account, would 'income tax' have to be paid if assets were sold prior to distribution to pay the estate tax?

2. If the tax status of the different assets were the same, which would you recommend using to pay the tax - stocks, bonds, annuities or IRA distribution (DW will have to begin IRA distibutions immediately, we've been advised).

I realize there are unanswered questions about the accounts which will affect the answers, but I'm sure a discussion will be educational for me. All the past discussions have been.

Thanks.
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Old 03-25-2012, 08:54 AM   #2
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Originally Posted by seraphim View Post
DW is in the midst of getting an inheritance which includes IRAs, annuities and stocks/bonds (unknown composition at the moment). She may have to sell some assets to pay the estate tax. It is also unknown which of the assets may be tax deferred and/or which ones may be taxable.

1. If assets are in a tax-deferred account, would 'income tax' have to be paid if assets were sold prior to distribution to pay the estate tax?

2. If the tax status of the different assets were the same, which would you recommend using to pay the tax - stocks, bonds, annuities or IRA distribution (DW will have to begin IRA distibutions immediately, we've been advised).

I realize there are unanswered questions about the accounts which will affect the answers, but I'm sure a discussion will be educational for me. All the past discussions have been.

Thanks.
seraphim, this is very broad category and it is difficult to be specific without more details. If the total value of the estate exceeds $5.12M it will be subject to federal estate tax. There may be state estate tax as well. Otherwise there probably is no estate tax due.

Assets in tax deferred accounts, such as an ordinary IRA, will be subject to income tax when they are withdraw, on 100% of the amount. Inherited IRA withdrawals are subject to RMD at the decedents rate in year 1 and after that it depends on how the accounts were distributed.

As assets in taxable accounts, such as stocks and bonds, are transferred to the new owners the cost is recorded as the fair market value the day they became owners, so when they sell, the only tax due is new capital gains.

How to determine what to sell depends on many things, not just tax rates. If the estate has multiple accounts, taxable and tax deferred, and a number of beneficiaries, the executor may have no option but to sell taxable assets to pay liabilities because the IRAs are transferred directly to the beneficiaries.
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Old 03-25-2012, 09:22 AM   #3
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How to determine what to sell depends on many things, not just tax rates. If the estate has multiple accounts, taxable and tax deferred, and a number of beneficiaries, the executor may have no option but to sell taxable assets to pay liabilities because the IRAs are transferred directly tot he beneficiaries.
I should mentioned the only estate tax is on the stated level. DW's brother is executor, 2 heirs, and I'm learning for him as well lol. I think, however, you have answered my basic question.

Since only the stocks/bonds do no not have beneficiaries listed, they are probably the ones which need to be sold to cover the estate tax. I hadn't considered named beneficiaries in the equation...

I'd much rather dump the annuities...
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Old 03-25-2012, 09:50 AM   #4
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I should mentioned the only estate tax is on the stated level. DW's brother is executor, 2 heirs, and I'm learning for him as well lol. I think, however, you have answered my basic question.

Since only the stocks/bonds do no not have beneficiaries listed, they are probably the ones which need to be sold to cover the estate tax. I hadn't considered named beneficiaries in the equation...

I'd much rather dump the annuities...
I did not know annuities were inherited and assumed they paid until the recipient passed away.

If there is no trust, the stocks and bonds will be distributed according to the will, if there was one. The IRAs are distributed according to the beneficiary designation. These may be totally different. The executor can't access the funds in the IRAs, only the beneficiaries can. Funds from the taxable accounts will be needed to pay probate expenses and all outstanding liabilities, then estate taxes, and then what is left over is given to the inheritors.
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Old 03-25-2012, 10:17 AM   #5
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Originally Posted by seraphim View Post
DW is in the midst of getting an inheritance which includes IRAs, annuities and stocks/bonds (unknown composition at the moment). She may have to sell some assets to pay the estate tax. It is also unknown which of the assets may be tax deferred and/or which ones may be taxable.

1. If assets are in a tax-deferred account, would 'income tax' have to be paid if assets were sold prior to distribution to pay the estate tax?

2. If the tax status of the different assets were the same, which would you recommend using to pay the tax - stocks, bonds, annuities or IRA distribution (DW will have to begin IRA distibutions immediately, we've been advised).

I realize there are unanswered questions about the accounts which will affect the answers, but I'm sure a discussion will be educational for me. All the past discussions have been.

Thanks.
About those bonds (and annuities as well) - It may not be a huge likelihood, but it's worth checking to see if any of them have an "estate feature" or "death put", where the estate can redeem the bond at full par upon the death of the owner. I purchased a number of these for my grandmother who passed away last year. Of course, if the market price of any of the bonds is above par, it would be better to sell them if no one wants to take ownership of part of the bonds.

I'm assuming the annuities are references to fixed annuities (the 'savings account' type). The other annuity that most people don't talk about are essentially term deposits issued by insurance companies, with a tax-deferral feature (like putting money in an IRA in a CD at a bank, only you can't do a SEPP withdrawal from an annuity, you have to wait to age 59 1/2). Fixed annuities offered by insurance companies and most fraternal benefit societies can actually be quite generous in the yields compared to short-term offerings at your bank (with a reducing early withdrawal penalty). While they don't have the FDIC-coverage, nearly all state regulators have strong requirements for insurance companies' annuity deposits, so it's not like you're rolling the dice a la Greece gov't bonds.

Regarding which to liquidate to sell the estate taxes - suggest to the executor that a list be made of all assets in the estate, and clarify which (if any) have the estate feature to redeem at par. Then see if anyone wanted any particular investments...or simply sell off the unwanted or lowest yielding investments.
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Old 03-25-2012, 11:06 AM   #6
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Thanks MooreBonds.

During the first meeting with the FA on the accounts, I didn't know enough to ask any questions. I recall he mentioned the annuities had 8 years left on the term (I believe that's how he phrased it). He also advised it had beneficiaries named.
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Old 03-25-2012, 11:08 AM   #7
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I did not know annuities were inherited and assumed they paid until the recipient passed away.
I don't know either. I'm building up a long list of questions for the FA though lol.
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Old 03-25-2012, 11:58 AM   #8
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It looks like some of the inheritiance will be from IRA accounts. It has been awhile but I recall reading some major cautions on deaing with inherited IRA's. Perhaps others on the Board here can weigh in on some of the cautions and preactions you want to consider but at the least be sure you get knowledgeable advise on your choices and implications. In one case, there were some substantial penalties resulting from heir not taking withdrawals on a timely basis.
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Old 03-25-2012, 12:34 PM   #9
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Are there any Savings Bonds in the person's name? Savings Bonds are unique in that at death they do not receive a stepped up basis, plus can be redeemed upon demand, often in convenient dollar amounts. This means the Bonds' accumulated interest can be easily accessed by redeeming them as needed to pay expenses of the estate. Since many expenses are tax deductible by the estate, the deductions can be used to offset the bond interest income, with a possible net result that the Bond interest is tax free.

If a person near death must take a tIRA RMD but has not yet done so, if that person is in a lower tax bracket than the IRA beneficiary, for tax purposes it is usually better the RMD be taken before death rather than after. An RMD before death will be taxed at the decedent's tax rate, whereas an RMD taken after will be taxed at the beneficiary's rate.
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Old 03-25-2012, 12:40 PM   #10
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I did not know annuities were inherited and assumed they paid until the recipient passed away.
We ran into this with my mother's estate. Since she never elected to have the annuities start their pay out phase it is passed along to heirs just as any other asset, however, all of the interest earned over the live of the accumulation phase of the annuity is taxable at you normal tax rate. The insurance/annuity companies allow you to take the money all at once or over multiple years.
.I waited until ER to start taking the funds.
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Old 03-25-2012, 12:45 PM   #11
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If a fixed annuity has not yet annuitized, then it generally passes to the beneficiary who must decide to begin payments as an annuity, withdraw a lump sum, or take payments over a defined period. Don't rely strongly on that info as I'm certainly not an annuity expert and those instruments are often very complex.
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Old 03-26-2012, 04:31 AM   #12
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Thanks for all the responses. Apparently it was a 10 year immediate annuity - the payout can be split between the two heirs and continue for the remaining 8 years, or can be a lump sum payout. Its unknown at this time what that amount would be - the 'remaining' amount (4/5) of the principal minus penalties A question for the FA today.
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Old 03-27-2012, 06:52 PM   #13
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Just came across a new article posted on the Fidelity site that covers all the variables to be addressed when dealing with IRA dispositons.
https://news.fidelity.com/news/artic...-in-retirement
This is an open part of Fido site so you should be able to access. Note graphic at beginning
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Old 03-28-2012, 12:09 PM   #14
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Thanks Steve.

It turns out even the IRA is in an annuity. About 2/3 of her portfolio is in annuities, the rest in stocks. Received a bunch of statements which have provided a ton of information. Have questions on using tax deferred vs taxable monies, but I'll start a new thread on that one. The IRA is obviously tax deferred (?), the stocks a taxable account, the other annuities could be either, I assume.

Going to dig through tax records tonight.
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Old 03-29-2012, 03:04 PM   #15
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If the estate is over the $5 MM estate tax exemption, your BIL definitely needs to consult a solid estate attorney and plan on hiring a CPA. You can get into mucho trouble with all of this and if a state estate tax is involved then you need them even more.

Annuity sales people love the elderly. They will sell them piles of overpriced garbage without end. My FIL was buying fixed annuities with 20 year lock ups when he was 80. I can't believe any decent person would sell them but I digress.

The annuities may have "payable on death" options but don't expect the S*B to actually tell you about them. They usually get a little extra by them not being redeemed early. Find the paperwork.

The annuities will have beneficiaries so their disbursement will not be controlled by the wills. This is pretty much the same as IRAs; but unlike IRAs, all beneficiaries must usually agree on their redemption. All of the IRAs and annuities are included in calculating the estate tax but are not directly available to the executor for actually paying the estate tax. It's possible with what you described that much of the assets not inside the annuities and IRAs may be needed to pay the estate tax.
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Old 03-30-2012, 01:29 PM   #16
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Thanks 2B..AFter several days working through past files I've got a good spreadsheet set up with all assets logged. The annuities are being disbursed, there are no hidden fees. The only thing that will be left is about $200k in stocks. That has to go through probate, it appears. No problems, just procedure.


Thanks to everyone here for the information. I'm ready now to start looking at allocating assets. Even though I'm retiring, I'm keeping a 30 year horizon in mind and want the assets to build; taking out as little as necessary.

This forum is fantastic.
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