Considering taxes in beneficiary designations

[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.

 

[frayne]

I understand exactly what you are talking about and I have had similar thoughts but in the end just felt like I was over thinking the whole thing and should concentrate on spending down my wealth. I know that doesn't help much but worrying about what your heirs may end up paying in taxes and trying to tweak it every so often seems a little ludicrous at this point in the game. Just my two cents and YMMV.

 

[splitwdw]

Is there any guarantee that the one kid's financial success will continue? We have no idea what future taxes will be, our financial successes or our health/death will be. It does sound like you are overthinking this.

 

[pb4uski]

I agree that it would be a moving target and would require periodic monitoring and adjustment.... given the low likelihood of DW and I dying at the same time I would be more inclined to reconsider this once only one of us is left... me directly and DW through my death letter.

And I'll concede that I may be overthinking this... which is why I asked the question in the OP.

 

[Dtail]

Interesting concept. I have the same situation that will not likely change and would consider it down the road.

 

[Texas Proud]

I would not worry about it at all.... not worth the time and effort to do the math to get it right...


Just leave each 50% and let them figure it out...


BTW, you did say everything to DW... so unless DW passes before you it also is a waste of time.... the only time this matters is if you both die at the same time.... then there is no time to adjust if this is the way you want to go...

 

[MichaelB]

So, are you going to ask them for updated income info each year to adjust the distribution of your assets? How can you be sure they are fully disclosing their real marginal tax rates? What happens if, after the inheritance is distributed, their respective marginal tax rates change? The child receiving the taxable IRA will have many years of withdrawals, and much can change over that time.

If you converted everything to a ROTH, it would be much more valuable to the child with the higher marginal tax rate. Shouldn’t you adjust for that as well?

My kids are in a similar situation regarding tax rates. My view is, anything they get from us is a net plus for them. If they want to see it as unfair or unequal, nothing I can do will change that. If they want to see it as a pleasant surprise, they will no matter how it’s carried out.

 

[97guns]

Don’t consider taxation for the beneficiaries, I’ve seen several estates distributed and there’s always some kind of tension when not distributed evenly to the beneficiaries. It raises suspicion, causes conflict, promotes greed and makes for overall uneasiness. My father did not want to leave my older brother much, I talked my dad into making it 1/3 even Steven, I did not want anyone thinking I manipulated anything.

My mom’s estate is not divided evenly but she is very open with it to me and my siblings that nothing is a surprise

My aunts family was completely destroyed by her estate distribution, 3 siblings do not speak and haven’t for 15 or so years.

 

[Corporateburnout]

We have two kids as well with different income potential and our beneficiary designation is 50/50 on all accounts. Assuming they're still money left in the accounts after we pass they can settle things between themselves if they choose to do so.

 

[candrew]

I recall when our DD informed me that I'd be executor of his modest estate. In telling us kids that as his heirs - myself and 2 siblings - we would likely have to pay taxes on an inherited IRA, he went on to remind us that it's money none of us kids had to w*rk for in the first place.

 

[97guns]

I’ve seen an estate of less than $10k get fought over, my brothers friends father passed and the headstone was $300 for delivery, one of the nephews with a truck and trailer offered to pick it up then charged the estate $300.

 

[GrayHare]

I think it's a reasonable idea and have done similar for my kids. On the downside it does require periodic revisiting as the accounts change in value.

 

[samclem]

I think this is a case where simple is better. Split it evenly before taxes. If we try to make things come out the same after taxes:
1) It gets darn complicated based on their ever-changing personal financial situations and valuations of Roth vs tIRA vs after tax accounts. That's something I'd hate to bother with as my mental acuity/energy wanes. And if left out of whack, it could result in some serious imbalances.
2) Somebody may feel "punished" for being less successful, since you'd be giving the lower-taxed kid (presumably the one with a lower income) less money.

IMO, better to give them the same amount and let the tax code/life be the "bad guy" responsible for the unequal "take" at the end of everything. Yes, it may mean that Uncle Sam takes a bigger bite at that point, but even that doesn't tell the whole story about how much he'll get over their lifetimes as a result of your generosity. It is entirely possible that minimizing the apparent tax bite upon your death isn't the best way to minimize the tax hit over the next decades of the life of your kids.

Giving each kid some Roth and some tIRA assets allows each the flexibility to manage their tax liabilities best as their own fortunes change and tax laws morph.

 

[pb4uski]

So, are you going to ask them for updated income info each year to adjust the distribution of your assets? How can you be sure they are fully disclosing their real marginal tax rates?....

I do their tax returns.

 

[Sue J]

When Dad died he left my sister and I some cash but most of his assets came to us as an inherited IRA. My sister and BIL pointed out that they are in the 33% federal tax bracket (in 2016). DH and I are in the 10% bracket.

We all concluded that it was a nice problem for them to have.

 

[Svensk Anga]

Reducing the family's total tax bite from 33% to 20% makes this a worthwhile idea in my view. To avoid hard feelings later, maybe it would be worthwhile to discuss your concept with the kids now.

That said, it seems hard to project each heir's lifetime tax rate as if they take RMD's over their life expectancy. Maybe the higher tax rate kid downshifts after you depart. Now he has a low tax rate and the Roth, and more after tax than his sibling. Maybe lower earner's fortunes improve. Maybe one moves and his state tax rate changes. Switching from married filing jointly to filing single or vice versa will change the calculus.

Since it will be so hard to get this right, maybe you do something part way between 50/50 on all account catgories and your theoretical optimum.

 

[MichaelB]

I do their tax returns.

So do I. My earlier reply was too flippant. Apologies.

Looking for “after tax fairness” is very complex, wanting to help them maximize the value of your gifts to them can be a worthwhile pursuit. I would do as samclem says, and keep it simple. Do the split, then look to see if there is anything you can do to make that share more valuable.

Remember the words of Robert Burns

“The best laid schemes o' mice an' men / Gang aft a-gley.”

 

[harley]

Split everything down the middle and go have a beer.

 

[Texas Proud]

Just throwing out another suggestion....

Leave the assets with the lowest tax impact with the high tax child...

Leave more to the child without that problem... but more than the tax amount.... say 5 to 10% more....

There is nothing that says you have to be 50/50 and unless the low tax child made bad decisions he/she could use the money more... IOW, the extra money would impact their lives much more than high tax child....

 

[audreyh1]

I do their tax returns.

OMG!

 

[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]

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]

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.