Leave Inheritance as a Faucet not a Fire hose ??

[rkser]

What to do with an inheritance: Use a faucet approach, wealth manager says

"They will make some mistakes, but at least they'll do that on the front end."

fortune.com

I came across this article, I do not know how it can be applied to one’s situation & want to get your thoughts & present for discussion.

For one, the taxable accounts get a full step up of cost basis on the date of parents passing, if the assets are passed on over a period of time then capital gains tax may have to be paid on the assets being passed on say over 5 to 10 years.

For the money in the Tax Deferred IRA accounts, there is a clock of 10 yrs now in effect that the assets are to drawn out already, I cannot understand how stretching the time of passing the assets will work.

For passing money in the Tax Free Roth accounts, a faucet type may work against a firehose .

Our children may already hopefully be in their 40s to 50s or later, and this may not apply to us.

We are going to leave our assets & the children may decide however ways they draw on them.

 

[Koolau]

All good problems to have, I'm sure. I plan to visit an elder law attorney to see what I can do to see that my charities get their share and then that the kids get what's left - with as little tax as possible.

 

[TheWizard]

The ten year clock for tax-deferred accounts which are inherited can be "stretched" in some cases by willing a portion of the first spouse to pass IRA to the offspring rather than 100% to survivor.
This assumes both spouses have IRAs in their own names.

Meanwhile, make all significant charitable contributions from tax-deferred to keep those funds from growing too much...

 

[TheWizard]

The article is rather clear about how to create a "faucet" effect: you have a lawyer set up a trust to parcel out funds over a decade or more.

And while tax-deferred accounts need to be emptied over ten years, the heir can take all the money out in the first year, which may be completely necessary to purchase that high-end Mercedes-Benz that he/she so rightfully deserves...

 

[target2019]

I think before you get too deep in your plan, consider the total that might pass. It probablly also helps to include some guess at longevity.

For now most of our assets will pass with a beneficiary. That example is in the article, but they use a widow for example.

For us this is definitely a topic ot review from time to time.

 

[RetiredHappy]

I would keep everything simple. Inherited IRAs already have a 10-year stretch. Another way to further stretch for your beneficiaries is to turn a bunch of your money into lifetime annuities for them.

 

[RunningBum]

As I said in a thread on gifting, I use annual gifts as a way to not only get some money to my son earlier when it is more useful for him, but also to see that he isn't reckless with that money. I've been doing that for years.

How is it working? 12 years ago I bought him a new compact wagon and suggested that he ought to be able to get at least 10 years out of it if he took good care of it. Just an hour ago I got a message from him that he was looking at a new slightly larger model while his car was in for service, but wasn't ready to buy yet, maybe not even this year. So I think it's going well.

 

[TheWizard]

I would keep everything simple. Inherited IRAs already have a 10-year stretch. Another way to further stretch for your beneficiaries is to turn a bunch of your money into lifetime annuities for them.

Hold on, we're talking about the possibility of financially irresponsible heirs here.
The ten year thing for inherited IRAs is only an issue for responsible heirs.
The irresponsible ones will likely take all or most of the money out of their inherited IRA as soon as they can, without regard to income tax...

 

[RetiredHappy]

Hold on, we're talking about the possibility of financially irresponsible heirs here.
The ten year thing for inherited IRAs is only an issue for responsible heirs.
The irresponsible ones will likely take all or most of the money out of their inherited IRA as soon as they can, without regard to income tax...

Well, if you have irresponsible ones, then leave most of your money to charity. The rest of the money, buy a lifetime annuity for them.

I have only one offspring and my financial advisor in Fidelity asked if it would "freak my son out" to get all that money if we both die. In other words, whether he would blow them all off. He is more likely to turn them all into cash and sit in the bank than to spend them. He lives on maybe $20K a year, and owns his own home outright. He does not know how to spend money. He lives in high cost of living California. That is an opposite problem. I bought him a car 12 years ago and it has cosmetic issues which should be fixed, i.e. fender bender, but he refuses to spend money to fix it. I told him that I would help him buy a new car. He said it still drives fine, so please don't waste your money.

 

[Exchme]

The article is about setting up trusts to spread the money out, but I don't think there is a step up in basis on death that way, the trust pays taxes at the maximum rate and there is a trustee that probably needs to be paid handsomely, so this is not the kind of plan for most folks here.

 

[OldShooter]

No surprise, the "faucet" also maximizes financial advisor fees and puts the money at risk from the whims of an unknown portfolio manager. I am sure Ms. Jinsky is expecting to help.

We are "dripping" to grands and DS, but have worked very hard to structure the trusts so that the future portfolio manager will have limited flexibility and fees are fixed and minimized. The principal means for limiting the portfolio is a list of "prohibited investments."

The article also omits discussion of future changes in circumstances, like a beneficiary getting a disease where in-home care or nursing home expenses will exceed the planned drip rate. This can be handled with what is called a HEMS clause, but like much of trust design it requires hired expertise

 

[TheWizard]

The article is about setting up trusts to spread the money out, but I don't think there is a step up in basis on death that way, the trust pays taxes at the maximum rate and there is a trustee that probably needs to be paid handsomely, so this is not the kind of plan for most folks here.

IANAL, but it would be quite annoying if no stepped up basis for your taxable account in a trust. A good lawyer should know how to make that happen...

 

[SecondCor521]

For the money in the Tax Deferred IRA accounts, there is a clock of 10 yrs now in effect that the assets are to drawn out already, I cannot understand how stretching the time of passing the assets will work.

For passing money in the Tax Free Roth accounts, a faucet type may work against a firehose .

FWIW, Roth IRAs are also generally subject to the 10 year SECURE Act clock.

The ten year clock for tax-deferred accounts which are inherited can be "stretched" in some cases by willing a portion of the first spouse to pass IRA to the offspring rather than 100% to survivor.

In most scenarios I know of, passing an IRA to an offspring will still be subject to the 10 year SECURE Act clock. Leaving it to the surviving spouse will, in most cases, stretch it longer than that because it'll stretch over the surviving spouse's life expectancy then another 10 years after that. But there are other planning considerations and leaving it to offspring can help with those.

Also, the IRS just established regulations that require RMDs during that 10 year SECURE timespan for traditional IRAs where the decedent had started RMDs (which again is probably the most common scenario).

IANAL, but it would be quite annoying if no stepped up basis for your taxable account in a trust. A good lawyer should know how to make that happen...

It depends on the type of trust. With a basic testamentary trust, you would get the step up. With an irrevocable trust of any type, you wouldn't get the step up, but on the other hand, the assets in the trust wouldn't be part of your estate and would not contribute to any estate tax exposure you might have. There are lots of different kinds of trusts.

 

[rkser]

I understand that Roth IRAs are inherited tax free & there is no 10 yr Secure 2 laws applying to this type of account..
Government has already got its taxes out of that Roth account, so there is no any time restriction.
Usually the Roth account is transferred to the beneficiary when the Roth account owner passes away.

 

[timbervest]

I understand that Roth IRAs are inherited tax free & there is no 10 yr Secure 2 laws about the 10 yr time limit.
Government has already got its taxes out of that Roth account, so there is no any time restriction.
Usually the Roth account is transferred to the beneficiary when the Roth account owner passes away.

The SECURE Act 2.0 has made several changes to the rules for distributing inherited Roth IRA assets, including:


10 year rule: Most non-spouse beneficiaries must withdraw the full balance of an inherited IRA within 10 years of the account owner's death. This rule applies regardless of when the account owner died in relation to their required beginning date.

Stretch IRA option: The SECURE Act 2.0 eliminated the ability to "stretch" taxable distributions over the beneficiary's life expectancy.

Penalty: If the account isn't depleted before the 10-year deadline, the beneficiary is subject to a 25% excise tax on the amount that remains. However, the penalty can be reduced to 10% if the account is emptied within two years.

 

[SecondCor521]

I understand that Roth IRAs are inherited tax free & there is no 10 yr Secure 2 laws applying to this type of account..
Government has already got its taxes out of that Roth account, so there is no any time restriction.

I disagree. From IRS Pub 590-B:

"Distributions to beneficiaries. Generally, the entire interest in the Roth IRA must be distributed by the end of the 5th or 10th calendar year, as applicable, after the year of the owner's death unless the interest is payable to an eligible designated beneficiary over the life or life expectancy of the eligible designated beneficiary. See When Must You Withdraw Assets? (Required Minimum Distributions) in chapter 1."

-- page 35 at https://www.irs.gov/pub/irs-pdf/p590b.pdf

The "unless" phrase above relates only to eligible designated beneficiaries. EDBs are relatively uncommon.

Although it's accurate that the income taxes were already paid on the Roth contributions, there is no taxation on any growth, dividends, or interest in the Roth, whereas those would generally be taxed once the money leaves the Roth. So the government still has a vested interest in limiting the duration of the Roth.

 

[Koolau]

I bought him a car 12 years ago and it has cosmetic issues which should be fixed, i.e. fender bender, but he refuses to spend money to fix it. I told him that I would help him buy a new car. He said it still drives fine, so please don't waste your money.

I like this boy!

 

[Car-Guy]

We give our one child "a nice chunk of change" each year. (Max gifting w/o required reporting) I've told her (multiple times) she'll also get whatever is left when we die but not to plan on anything being left. I've set expectations and I'm doing my best to BTD.

 

[pb4uski]

The ten year clock for tax-deferred accounts which are inherited can be "stretched" in some cases by willing a portion of the first spouse to pass IRA to the offspring rather than 100% to survivor.
This assumes both spouses have IRAs in their own names. ...

Do you have a cite for that? My understanding is that 10 year is the max for all non-spouse inherited IRA with a couple narrow exceptions. You used to be able to bequeath an IRA to a grandchild and really stretch out the tax deferral but they nipped that a few years ago.

 

[rkser]

I had mentioned to our son that we will help towards with the down payment when he buys his house.

He is getting ready to buy a house in next several months & I am feeling strange about parting with $80 to $100k.

Deep down thoughts of spoiling our 32 yr old son by giving that kind of money.

We did not get any money from our parents, it is all save & invest during our life time.

But at the same time our healthy Net worth with our invested portfolio is progressively getting higher.

Our Charitable contributions are at present highest .

I would not know what else to do with the invested money otherwise.
We tried but we just cannot spend more than what we do now, call us creatures of lifelong habits.

I probably will transfer VTI shares so he is on the hook for the Cap Gains rather than us.

The Fidelity Plan projections show we will leave a few million each to our 2 children’s when we pass.

I wonder if other members have had such feelings before eventually gifting large sums to children.

I understand & prefer giving with a warm hand rather than a cold one.
I know a house will eventually be good for son & daughter in law.

 

[Sunset]

I had mentioned to our son that we will help towards with the down payment when he buys his house.

He is getting ready to buy a house in next several months & I am feeling strange about parting with $80 to $100k.

Deep down thoughts of spoiling our 32 yr old son by giving that kind of money.

We did not get any money from our parents, it is all save & invest during our life time.

But at the same time our healthy Net worth with our invested portfolio is progressively getting higher.

Our Charitable contributions are at present highest .

I would not know what else to do with the invested money otherwise.
We tried but we just cannot spend more than what we do now, call us creatures of lifelong habits.

I probably will transfer VTI shares so he is on the hook for the Cap Gains rather than us.

The Fidelity Plan projections show we will leave a few million each to our 2 children’s when we pass.

I wonder if other members have had such feelings before eventually gifting large sums to children.

I understand & prefer giving with a warm hand rather than a cold one.
I know a house will eventually be good for son & daughter in law.

Personally, I believe Charity begins at home.

With that thought in mind, I'd have no issue cutting back on various charities in order to help out responsible relatives.

 

[TheWizard]

Do you have a cite for that? My understanding is that 10 year is the max for all non-spouse inherited IRA with a couple narrow exceptions. You used to be able to bequeath an IRA to a grandchild and really stretch out the tax deferral but they nipped that a few years ago.

What I meant was two separate ten year spans.
Spouse #1 passes this year and leaves 80% of his/her tIRA to adult offspring who have until 2034 to empty it
Spouse #2 lives over a decade longer and leaves entire remaining tIRA to same offspring who have new ten year period starting 2035 or later...

 

[Koolau]

I had mentioned to our son that we will help towards with the down payment when he buys his house.

He is getting ready to buy a house in next several months & I am feeling strange about parting with $80 to $100k.

Deep down thoughts of spoiling our 32 yr old son by giving that kind of money.

We did not get any money from our parents, it is all save & invest during our life time.

But at the same time our healthy Net worth with our invested portfolio is progressively getting higher.

Our Charitable contributions are at present highest .

I would not know what else to do with the invested money otherwise.
We tried but we just cannot spend more than what we do now, call us creatures of lifelong habits.

I probably will transfer VTI shares so he is on the hook for the Cap Gains rather than us.

The Fidelity Plan projections show we will leave a few million each to our 2 children’s when we pass.

I wonder if other members have had such feelings before eventually gifting large sums to children.

I understand & prefer giving with a warm hand rather than a cold one.
I know a house will eventually be good for son & daughter in law.

We started our kids out to be very independent and never suggested that we would help with down-payments (or anything else.) BUT, we have done things like fund their Roth IRAs (1K to 3K per year), $1500/yr for insurance (their choice of whole life, term, universal, or disability, etc.) and we actually did help all of them with down payments on their houses - but to the tune of $10K. None of this has interfered with our charities which we can fund from our 401(k) etc.

 

[TheWizard]

We started our kids out to be very independent and never suggested that we would help with down-payments (or anything else.) BUT, we have done things like fund their Roth IRAs (1K to 3K per year), $1500/yr for insurance (their choice of whole life, term, universal, or disability, etc.) and we actually did help all of them with down payments on their houses - but to the tune of $10K. None of this has interfered with our charities which we can fund from our 401(k) etc.

You probably already know that we can't do QCDs from a 401(k) or 403(b) (in my case), only from a tIRA.
This is one big reason I've started moving $$$ from my 403(b) to my tIRA each December after my RMD is complete...

 

[Koolau]

You probably already know that we can't do QCDs from a 401(k) or 403(b) (in my case), only from a tIRA.
This is one big reason I've started moving $$$ from my 403(b) to my tIRA each December after my RMD is complete...

Yes, and I'm considering transferring 401(k) money to tIRAs for that reason. Good reminder to all here (since this is where I learned about QCDs.)