New Member - Inheritance Question

[packraider]

Hi.  My wife and I are both in our mid-30's and are not close to retiring, but are working towards it hopefully in our 50's.  I recently discovered this site and it is definitely motivating.

My wife and I make approximately 140k combined and regularly fund our Roth IRA's.  Unfortunately, Her mom just passed away recently and it looks like we may end up receiving some life insurance and possibly whatever is left in equity from the sale of her house less her outstanding debts. 

My question is if her inheritance counts towards the Roth income limits and what would happen if we already contributed some funds and ended up exceeding the limit?

 

[riskadverse]

Your inheritance should be taxed before you recieve it - thus would not count as income - provided you don't take the inheritance and change it's form.  For example, you inherit stock and then you sell it at a profit.

Concerning contributions made and later finding out you exceeded the qualification limits, you can perform a "recharacterization" where you transfer the amount you contributed to the Roth to a standard IRA.  I believe the earnings realized from that amount need to be transfered as well.  It's a fairly common practice, as a number of people contribute to Roth IRA's and later end up earning more than the qualification limits for that taxable year.  I haven't kept up with the limits over the past few years, but you may be close to the limit already.

 

[Martha]

I assume that there was no trust created by your mother. That can change the tax issues. Also, I assume there are no annuities or retirement funds your wife is inheriting. Otherwise, if the executor/personal representative sells the home and distributes net proceeds to your wife and your wife is the beneficiary of life insurance, these items should not be taxable income to your wife and won't affect Roth eligibility.

 

[packraider]

Thanks for the info riskaverse and Martha. Her mom only had a typed/notarized will and no trust.

 

[JPatrick]

Hi.  My wife and I are both in our mid-30's and are not close to retiring, but are working towards it hopefully in our 50's.  I recently discovered this site and it is definitely motivating.

My wife and I make approximately 140k combined and regularly fund our Roth IRA's.  Unfortunately, Her mom just passed away recently and it looks like we may end up receiving some life insurance and possibly whatever is left in equity from the sale of her house less her outstanding debts. 

My question is if her inheritance counts towards the Roth income limits and what would happen if we already contributed some funds and ended up exceeding the limit?

You mention two items. Life insurance and sale of a residence.  The life insurance is a non tax issue.  The residence may or may not generate a cap gain.  Assuming you get it at a stepped up basis and sell soon there may be no gain. Of course the debts have no play in either issue except that you (the estate) must pay them.
Should be no roth affect at all.

 

[Brat]

It may be to both your benifit if your mother creates a revocable living trust. That doesn't impact taxes currently or at her passing, but it does make caring for her financial needs much easier.

 

[smooch]

Brat,

Could you explain how a trust makes caring for her financial needs easier?

 

[Brat]

A revocable living trust enables the grantor to designate who can manage the assetts in the trust (trustees) and what they can do under described circumstances.  This eliminates the need to ask a judge.  While a POA in theory can do the same thing, it is my experiance that financial orgs don't like POAs and are reluctant to honor them.  The trust docs are easier to modify, POA's are harder to pull back and if they expire then it is back to the judge. 

Also the grantor can describe how the residue of the trust is to be distributed at their passing, just as in a will.  No probate.

 

[Patrick]

It may be to both your benifit if your mother creates a revocable living trust.  That doesn't impact taxes currently or at her passing, but it does make caring for her financial needs much easier.

Unfortunately, you can't set up the trust after her death. 

 

[Brat]

I had a senior moment when I wrote the following, I didn't remember that the Mother had passed on. In that case it is too late for Mom to establish a trust. As you can see from what I wrote my husband and my parents have found revocable trusts useful, and it has preserved our sanity as we look after them when they cannot.

----
That is not true.  Your mother can set up a revocable living trust, let's call it "FamilyTrust".  When she sets up the trust SHE states what the trust assetts are to be used for (AKA, anything I darn well want and after I ask my trustees to take care of my bills they can only spend it on ME!), and how she wants any assetts remaining in the trust after she dies distributed.  Her assetts need to be put in the trust (bank accounts, investment accounts, realestate, but not the small stuff like an old car).  The trust uses her SSN so all the earnings are hers, it doesn't change estate tax when she passes.  Nothing different when she sells her home as the trust is her handy-dandy entity. 

If she wants to change the trust provisions she can do so.  She can kill the trust and put them back in her own name.  She can create a different trust and move her assetts into the new trust.  It is like a ladies purse.  It can hold a lot, you can use what is in it to meet your needs, if it gets warn and icky you can get a new one, and if you can't manage it's contents you can ask someone else to take care of it.

This enables trustees to step in when the need arises and eliminates probate for anythin in the trust name.   Martha, correct me if I am wrong, please.

 

[malakito]

Brat,

I assume you are replying to Patrick's post. If so, I suggest you reread the original post. The mother has already passed away.

BTW, I believe the Roth income exclusion for MFJ is $160K, but I'm not sure. Check Pub 590 from the IRS for the definitive numbers.

Also, don't forget that any sales costs from selling the house should be deducted from the capital gains (if any), so you may in fact have a small loss.

malakito.