Estate planning

[BP in ME]

Now that tax season is behind us, here's a little PSA for those of you who have an IRA they might be leaving to your heirs. If you decide to use a trust to convey your estate, DO NOT make the trust the beneficiary of your IRA. My father wanted to make things easier on us after he passed so he put the house, IRA, etc. in a trust so we wouldn't have to go through probate. He didn't get good advice on the IRA part.

Just to review the sales pitch for opening an IRA, they tell you it's basically deferred income that you use for retirement. You don't pay taxes on it now, it grows, and most pay a lower tax rate when you take IRA distributions after retirement because your annual earned income is less than when you were working.

Under current rules, an inherited IRA has to be drawn down to zero within 10 years at any rate you choose (lump sum, 10% a year, whatever you want). 100% of each distribution is taxable. The downside here is that a trust showing an income of $20,000 or more is taxed at 37%. Add state tax and it can be around 45% if your state has income tax. End result is the govt. takes 45% of any IRA over $200K if it's in a trust.

As I understand it, if it's outside the trust, each heir is taxed at their current rate for what they receive. For a lot of folks, that's going to be 20-30% combined tax. Makes a big difference.

[Jeff Hahn]

Similarly, based on the advice of one of my brother's law partners, an "expert" estate planning and trust attorney, my Mom put many of her assets, including her house, in an irrevocable trust. Part of the benefit of the irrevocable trust was to protect her assets from Medicaid. Yeah, if she would have lived to 110 years old, she might have run out of assets to cover her care. But, the realistic odds that she would run out of money to pay for her care was virtually zero. One thing the attorney did not tell us was that when her house was put in the trust, we were going to have to pay capital gains taxes when she passed. Had the house not been put in the trust, we could have taken her one time exemption for paying capital gains on a primary residence. Or, if either my brother or sister, or I had moved into the house before she passed, we would have avoided the capital gains taxes. We were told none of this and did not have sufficient expertise to ask questions about these matters. Instead, we got hosed on the taxes.

[tcesni]

Now that tax season is behind us, here's a little PSA for those of you who have an IRA they might be leaving to your heirs. If you decide to use a trust to convey your estate, DO NOT make the trust the beneficiary of your IRA. My father wanted to make things easier on us after he passed so he put the house, IRA, etc. in a trust so we wouldn't have to go through probate. He didn't get good advice on the IRA part.

Just to review the sales pitch for opening an IRA, they tell you it's basically deferred income that you use for retirement. You don't pay taxes on it now, it grows, and most pay a lower tax rate when you take IRA distributions after retirement because your annual earned income is less than when you were working.

Under current rules, an inherited IRA has to be drawn down to zero within 10 years at any rate you choose (lump sum, 10% a year, whatever you want). 100% of each distribution is taxable. The downside here is that a trust showing an income of $20,000 or more is taxed at 37%. Add state tax and it can be around 45% if your state has income tax. End result is the govt. takes 45% of any IRA over $200K if it's in a trust.

As I understand it, if it's outside the trust, each heir is taxed at their current rate for what they receive. For a lot of folks, that's going to be 20-30% combined tax. Makes a big difference.

Would a Roth IRA where taxes have already been paid be treated differently?

[BP in ME]

Would a Roth IRA where taxes have already been paid be treated differently?

That's a good question. I don't know the answer and even if I did, the rules are subject to change at the whims of dear old IRS. I would hope it's not taxable and would be treated like cash assets

[wackyjoe]

Going thru the inherited ira thing myself this year.
They won't have to worry about the national debt after there done with me.
I don't think they can tax your heirs on a roth---Yet

[NitroZ7]

Under current rules, an inherited IRA has to be drawn down to zero within 10 years at any rate you choose (lump sum, 10% a year, whatever you want). 100% of each distribution is taxable. The downside here is that a trust showing an income of $20,000 or more is taxed at 37%. Add state tax and it can be around 45% if your state has income tax. End result is the govt. takes 45% of any IRA over $200K if it's in a trust.

As I understand it, if it's outside the trust, each heir is taxed at their current rate for what they receive. For a lot of folks, that's going to be 20-30% combined tax. Makes a big difference.

The higher taxes apply to things like non-qualified dividends and interest income. When you speak with your broker/advisor etc. then maybe look at holding dividend paying stocks that only pay qualified dividends. This what I do with money in the trusts I have. With respect to interest from bonds or non qualified dividends I distribute those out to my kids each year for tuition and rent at school and then they receive a Schedule K and it gets taxed at their tax rate. I agree that it would be better to just name an individual beneficiary for a an IRA. I inherited my dads IRA when he died and the financial institution just transferred it to an inherited IRA account and it was very easy. He died before the change so I don't have to use it within 10 years but I do have to take required minimum distributions.

[txbass1]

That's a good question. I don't know the answer and even if I did, the rules are subject to change at the whims of dear old CONGRESS. I would hope it's not taxable and would be treated like cash assets

Fixed it for you.

[n2ratfishin]

Some things are just worth what they cost, IMO estate planning is one of them.

[Hydrasport80]

Similarly, based on the advice of one of my brother's law partners, an "expert" estate planning and trust attorney, my Mom put many of her assets, including her house, in an irrevocable trust. Part of the benefit of the irrevocable trust was to protect her assets from Medicaid. Yeah, if she would have lived to 110 years old, she might have run out of assets to cover her care. But, the realistic odds that she would run out of money to pay for her care was virtually zero. One thing the attorney did not tell us was that when her house was put in the trust, we were going to have to pay capital gains taxes when she passed. Had the house not been put in the trust, we could have taken her one time exemption for paying capital gains on a primary residence. Or, if either my brother or sister, or I had moved into the house before she passed, we would have avoided the capital gains taxes. We were told none of this and did not have sufficient expertise to ask questions about these matters. Instead, we got hosed on the taxes.

Exactly the same happened to us, using "expert" advice. Got killed on taxes.

[BigEasy]

Some things are just worth what they cost, IMO estate planning is one of them.

BINGO!

I’m far from a rich man but my sister is a CPA, and a darn good one. Her advice is get an accountant, a financial planner and a lawyer at the same table and go through all of the planning stuff together. It’s fun to watch them pose questions to one another and they remember little things that may have slipped their mind when one of the other’s asks the right question.

It’s not a cheap meeting but it will pay dividends in the end.

[paul40269]

So what's the work around? Don't put the IRA in the trust and just name the beneficiaries on the IRA so they get paid out individually and taxed individually?

[willwork4fish]

Is there any Estate planning mechanism that allows the IRA to be distributed under the gift tax exclusion after someone passes?

[btlsranger]

Is there any Estate planning mechanism that allows the IRA to be distributed under the gift tax exclusion after someone passes?

I believe the answer is no, last time I asked. Only executor fees can be gifted.

[NitroZ7]

Some things are just worth what they cost, IMO estate planning is one of them.

I am an attorney and I still hired an estate planning attorney to draft the trusts, will etc. There are so many potential pitfalls and the laws are constantly changing. Definitely was worth what I paid. As with anything else though you need to make sure you get an attorney that specializes in estate planning and get recommendations.

[BP in ME]

Fixed it for you.

No, I meant the IRS. Congress making laws is one thing; how the IRS chooses to interpret and apply the laws is another

[BP in ME]

So what's the work around? Don't put the IRA in the trust and just name the beneficiaries on the IRA so they get paid out individually and taxed individually?

That seems to be the simplest solution. There could be other more complicated work-arounds but naming specific beneficiaries should work

Is there any Estate planning mechanism that allows the IRA to be distributed under the gift tax exclusion after someone passes?

Keep in mind that the income was never taxed. They aren't going to let you get away with keeping all of it.

[JoshKeller]

And this is why I told my parents to spend their money and not leave anything to me. Their farm is to be donated to the autobahn society and I'm perfectly OK with that.

[Whiteboat]

Now that tax season is behind us, here's a little PSA for those of you who have an IRA they might be leaving to your heirs. If you decide to use a trust to convey your estate, DO NOT make the trust the beneficiary of your IRA. My father wanted to make things easier on us after he passed so he put the house, IRA, etc. in a trust so we wouldn't have to go through probate. He didn't get good advice on the IRA part.

Just to review the sales pitch for opening an IRA, they tell you it's basically deferred income that you use for retirement. You don't pay taxes on it now, it grows, and most pay a lower tax rate when you take IRA distributions after retirement because your annual earned income is less than when you were working.

Under current rules, an inherited IRA has to be drawn down to zero within 10 years at any rate you choose (lump sum, 10% a year, whatever you want). 100% of each distribution is taxable. The downside here is that a trust showing an income of $20,000 or more is taxed at 37%. Add state tax and it can be around 45% if your state has income tax. End result is the govt. takes 45% of any IRA over $200K if it's in a trust.

As I understand it, if it's outside the trust, each heir is taxed at their current rate for what they receive. For a lot of folks, that's going to be 20-30% combined tax. Makes a big difference.

Been through this before with both my parents trusts, and a trust used for probate purposes is not a taxable entity. Any income from the trust is a flow through to the individual tax return of the respective beneficiary. There are no tax implications from a trust.

[bassdge]

A trust can be named the beneficiary of an IRA and work fine if it has the proper look through provisions. The problem is the Secure Act changed the beneficiary rules, so trusts written before 2019 may not have the proper language post secure act. These documents do need to be reviewed and revised as laws change.
the new 10 yr inherited IRA distribution rule only applies to non spousal beneficiaries who are more than 10 years younger than the decedent.
I am not sure with the new rule why anyone would name a trust as a beneficiary anymore.

You do not need a trust to avoid probate. Any account that you name a beneficiary on automatically avoids probate and goes directly to the beneficiary. You can name beneficiaries on checking, saving, investment accounts by adding Payable on Death POD or Transferable on Death designation to the account. Some states even allow you to do this on real estate deeds.

By the way, many people misunderstand what the attorney tells them to do. A large amount of trusts are never funded correctly by the client.

[NitroZ7]

A trust can be named the beneficiary of an IRA and work fine if it has the proper look through provisions. The problem is the Secure Act changed the beneficiary rules, so trusts written before 2019 may not have the proper language post secure act. These documents do need to be reviewed and revised as laws change.
the new 10 yr inherited IRA distribution rule only applies to non spousal beneficiaries who are more than 10 years younger than the decedent.
I am not sure with the new rule why anyone would name a trust as a beneficiary anymore.

You do not need a trust to avoid probate. Any account that you name a beneficiary on automatically avoids probate and goes directly to the beneficiary. You can name beneficiaries on checking, saving, investment accounts by adding Payable on Death POD or Transferable on Death designation to the account. Some states even allow you to do this on real estate deeds.

By the way, many people misunderstand what the attorney tells them to do. A large amount of trusts are never funded correctly by the client.

It really sort of depends how it is structured. If you have irrevocable trusts or a revocable trust that gets split into irrevocable trusts once the decedent dies then those normally require a separate EIN and any income generated that does not get distributed gets taxed at the trust level. It is a damn rabbit hole in terms of complexity and tax issues. It really should not be this complicated but the tax laws just put people through hell after losing a parent. I am dealing with this 5 years later after my dad died.