Financial Planning for beneficiaries.

[wolf]

Demise of:

1. Stretch IRA

2. Potential changes:
A. Do away with " step up in Basis"
B. Reduce the Estate Tax gift exemption" from $ 11+ million, to 1-3 mil.
C. Increase long term capital gain tax.

How are you handling, your Trust. If you own, house and rental properties,
IRA's, etc. And want to leave "something" to your children. So they can
continue to live in "expensive" San Francisco Bay Area. ?

 

[Finance Dave]

Not much of that applies to us...so minimal change in strategies. We will be more affected by any changes in Medicare, ACA, marginal rates, and RMDs.

We don't have a Trust...just simple wills (which we first created in our mid 30s, and have since updated twice). One marriage for each of us, no children, so very simple situation. The only complication we have is rentals...wife wants nothing to do with them so I won't hold them late in life. I plan to start selling them off in a few years maybe 1-2 per year.

 

[OldShooter]

Everything the heirs get will be in IRAs and Roths in irrev trusts managed by Schwab. Grands and son will get IRAs and the expectation is that the trustee will pay them 100% of the income in the year received by the end of the required 10 years period and the trusts will be shut down. One grand is getting a special needs trust funded from the Roths, so the trustee doesn't have to pay out the the proceeds to avoid taxation at the trust level.

Re potential changes there are always potential changes. I will worry about them when they become actual changes.

 

[38Chevy454]

Re potential changes there are always potential changes. I will worry about them when they become actual changes.

While I would not bet against increasing taxes, I also will wait until something is actually law before I react.


As for OP's question, all you can do is set things up now based on existing laws and rules. Then adapt as needed over time. Talking with an estate expert for your state is wise, as what works for someone out of your state is not necessarily going to work for your situation.

 

[Dash man]

We set up an IRA Inheritance Trust for our kids. Basically, when they have to take distributions from the IRA, after any taxes due are paid they put the money into the trust to retain the protections that retirement accounts have from lawsuits and creditors. It is likely to be a significant amount of money, so being able to retain those protections is a nice benefit.

 

[Animorph]

Too early for me to change anything. We do have a trust that works for the older estate tax laws when you had to hold half the estate in a trust when one spouse died. We'll need to revisit all that if the laws settle down. That's about my speed.

We'll have some in a tIRA and the rest in a Roth. I'm not expecting to have either of those significantly impacted in a way we can do anything about. But you never know.

 

[JDARNELL]

Another timely subject. I will be monitoring this thread as these changes could be brutal and I need to work thru these same issues. My goal was to have a plan in place by end of year but that may be delayed with these potential changes.

 

[harley]

I had been planning on the stretch IRA. Kaput.

I have two rentals, and my escape plan involves stepped up basis. I doubt that plan will make it past both our life times. I may have to sell them myself and take the big tax hit.

If the estate exemption drops far enough to affect us, I'll work on gifting as much as possible and reasonable while alive.

While I agree that you can only deal with what is, I am also pretty sure that the plans we have currently have will not properly manage what will be. Gov't spending can't be sustained with existing taxation levels. My best precognitive plan is to get as much of our taxable wealth (including tIRA money) into Roth IRAs, thus avoiding a lot of estate tax. Then spend the rest of the after tax money, and the rest (homes, rentals, etc.) will hopefully not exceed the future estate tax level by too much. This is based on my current reading of tea leaves, chicken entrails, and financial articles. In that order of importance.

 

[MrLoco]

I had been planning on the stretch IRA. Kaput.

I have two rentals, and my escape plan involves stepped up basis. I doubt that plan will make it past both our life times. I may have to sell them myself and take the big tax hit.

If the estate exemption drops far enough to affect us, I'll work on gifting as much as possible and reasonable while alive.

While I agree that you can only deal with what is, I am also pretty sure that the plans we have currently have will not properly manage what will be. Gov't spending can't be sustained with existing taxation levels. My best precognitive plan is to get as much of our taxable wealth (including tIRA money) into Roth IRAs, thus avoiding a lot of estate tax. Then spend the rest of the after tax money, and the rest (homes, rentals, etc.) will hopefully not exceed the future estate tax level by too much. This is based on my current reading of tea leaves, chicken entrails, and financial articles. In that order of importance.

I'm confused. How does moving money from a Trad. IRA to a ROTH avoid estate taxes? I understand heirs will not owe taxes on distributions; but any money in a ROTH is still considered part of your estate and counts toward the overall number of how big your estate will be. Or am I mistaken?

 

[RunningBum]

I'm confused. How does moving money from a Trad. IRA to a ROTH avoid estate taxes? I understand heirs will not owe taxes on distributions; but any money in a ROTH is still considered part of your estate and counts toward the overall number of how big your estate will be. Or am I mistaken?

If you have a tIRA in your estate it holds your deferred tax liability. A Roth conversion or IRA withdrawal lessens your estate by the taxes paid, while leaving you with the same spending power.

 

[OldShooter]

Another timely subject. I will be monitoring this thread as these changes could be brutal and I need to work thru these same issues. My goal was to have a plan in place by end of year but that may be delayed with these potential changes.

Better is the enemy of good. Just be sure to have a good estate plan in place the night before you die.

 

[harley]

If you have a tIRA in your estate it holds your deferred tax liability. A Roth conversion or IRA withdrawal lessens your estate by the taxes paid, while leaving you with the same spending power.

What he said.

 

[JDARNELL]

Better is the enemy of good. Just be sure to have a good estate plan in place the night before you die.

Lol. If I knew that date I wouldn’t need a plan but would be throwing one heck of a party earlier in the day ensuring I leave $1 less than the estate tax kick in to pass on.

 

[pacergal]

I am not planning my estate to be based on where my kids will live.
Hopefully, we have enough to care of us until we die, with some left over for them.
They can take it however the law allows, and hopefully, whatever is left will give them a nicer retirement.
Both our kids are in great careers they love, but not high paying ones.

And they repeatedly tell us they'd rather have us around than have our money

 

[FIREchief]

I'm planning to grow my assets by an extra 66%, so that even if they are all subject to a 40% estate tax my heirs will still receive the same amount.

Okay, that's obviously not 100% serious, but it's likely the only way to avoid severe reductions to the estate tax exclusion. Also, stating the obvious, gifting now to the maximum annual exclusion reduces your ultimate estate tax liability and may even be of more value to your eventual heirs. I'm guessing that anybody worried about a reversion to the $3.5M per individual estate exclusion could likely live with a few less bucks now. Right?

 

[FIREchief]

Demise of:

1. Stretch IRA

2. Potential changes:
A. Do away with " step up in Basis"
B. Reduce the Estate Tax gift exemption" from $ 11+ million, to 1-3 mil.
C. Increase long term capital gain tax.

Just to clarify, the proposals currently on the table have suggested returning the estate tax exclusion to $3.5M per individual and increasing LTCG rates only on very high taxable incomes.

 

[harley]

Just to clarify, the proposals currently on the table have suggested returning the estate tax exclusion to $3.5M per individual and increasing LTCG rates only on very high taxable incomes.

That's how it starts. They didn't used to be able to pull you over for just not wearing a seat belt either.

 

[JDARNELL]

I was meeting with my CFP today and we agreed to see what progresses in the next 6 months. I suspect there are a lot of posturing and a lot people
In front of me that are gonna be leaning forward on estate planning that I can learn from.

 

[RunningBum]

...
Also, stating the obvious, gifting now to the maximum annual exclusion reduces your ultimate estate tax liability and may even be of more value to your eventual heirs. I'm guessing that anybody worried about a reversion to the $3.5M per individual estate exclusion could likely live with a few less bucks now. Right?

Yes. It's got the double benefit of being outside the estate exclusion, and helps now when they might need it more than when they get their bigger inheritance. For those who see it very likely that their money will easily outlive them, of course. And if they don't pay cap gains tax, you can gift them appreciated stock or mutual fund shares.

 

[harley]

Yes. It's got the double benefit of being outside the estate exclusion, and helps now when they might need it more than when they get their bigger inheritance. For those who see it very likely that their money will easily outlive them, of course. And if they don't pay cap gains tax, you can gift them appreciated stock or mutual fund shares.

I always used to tell DD that she would probably inherit a decent amount of money one day. However, her mom and I were going to do our best to make sure that she would be so old when it happened that it wouldn't do her much good. So if you want to have/do the things in life that she wants to she needs to work/LBHM/invest on her own.

She's done a pretty good job so far, so we've started to gift her some. Most of it goes straight into savings. Hopefully we'll be able to continue for long enough to make an impact on our taxable estate.

 

[wolf]

Currently working with Lawyer, update our living trust, (CA). Planning to delete A/B.
but, if Estate tax reduced to 3.5 million. Then not a good idea.

Here in expensive California. Just owning your residence and a couple of rentals, you
can easily go over the 3.5 million. Then add in some stocks and bonds.

Curious, is an IRA considered part of ones estate? Also, is the value of the estate
total market value less any debt. Or just market value?

 

[MichaelB]

Just to clarify, the proposals currently on the table have suggested returning the estate tax exclusion to $3.5M per individual and increasing LTCG rates only on very high taxable incomes.

There are no tax proposals currently on the table or under consideration by Congress. As of now what we have is some campaign rhetoric and some pronouncements by political figures, neither of which is actionable.

 

[SecondCor521]

I'm guessing that anybody worried about a reversion to the $3.5M per individual estate exclusion could likely live with a few less bucks now. Right?

You'd think. There are emotions involved. And as I pointed out on another similar thread, someone who is at that point has probably lived through a lot of history that involved some Bad Things Happening, like world wars, stagflation, 1987 market crash, etc. and would understandably want to be UberMegaBulletproof against similar risks over the remainder of their life.

Just to clarify, the proposals currently on the table have suggested returning the estate tax exclusion to $3.5M per individual and increasing LTCG rates only on very high taxable incomes.

And increasing the estate tax rate from 40% to 45%. But at this point it's only in the policy proposal stage, so let's see what happens.

Currently working with Lawyer, update our living trust, (CA). Planning to delete A/B.
but, if Estate tax reduced to 3.5 million. Then not a good idea.

Here in expensive California. Just owning your residence and a couple of rentals, you
can easily go over the 3.5 million. Then add in some stocks and bonds.

Curious, is an IRA considered part of ones estate? Also, is the value of the estate
total market value less any debt. Or just market value?

There is something called DSUEA which I think largely eliminates the need for A/B trusts regardless of the estate tax exemption amount. But IANAL, consult your own.

Yes, an IRA is considered part of one's federal gross estate. Debts are subtracted to arrive at the taxable estate, which is what is compared against the exclusion amount to determine the estate tax due, if any. See IRS instructions for Form 706 Schedule K.

 

[OldShooter]

... I'm guessing that anybody worried about a reversion to the $3.5M per individual estate exclusion could likely live with a few less bucks now. Right?

Not always. One of the issues with estate taxes is illiquid assets like businesses and farms. Farms, in particular, are paper wealth that is not available to the owners and, worse, not available to pay estate taxes. I don't know how often it happens but in theory one might see family farms owned for generations sold off to pay the taxes. Illiquid assets are fertile ground for insurance salespeople where the insurance payoff then pays the taxes.

 

[USGrant1962]

There are no tax proposals currently on the table or under consideration by Congress. As of now what we have is some campaign rhetoric and some pronouncements by political figures, neither of which is actionable.

Current law has the estate tax exemption dropping to $5M (2017 dollars) plus inflation in 2026. Probably something like $6M at the time.