What is the best way to inherit a large IRA amount

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Toujour
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Joined: Sat Apr 07, 2018 8:36 am

What is the best way to inherit a large IRA amount

Post by Toujour » Sat Apr 07, 2018 8:43 am

Hello everyone,
My father and mother started investing with Vanguard a very long time ago and have compiled a very nice portfolio. The problem is a large amount of money is in an IRA and they are getting hit with very large tax bills on those required minimum distribution. They plan on passing on as much to their several kids and grandkids as they can. They have converted a fair amount from their IRA to their Roth but again are getting hit with large tax bills. They live in A state that has average income tax. Here are their numbers:

My Father is 82 years old.
His IRA-- 2,900,000
His Roth- 860,000
My Mom is 78 years old.
Her IRA-- 172,000
Her Roth- 320,000
Non retirement vanguard is in my moms name -- 2,500,000
House valued at 300k

Any ideas on how to get money out of his retirement account without paying such large tax bills? Is it smart to convert the IRA amount to a Roth?
They would be interested in funding 529’s if that made sense.
Ideas???
Thank you.

Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: What is the best way to inherit a large IRA amount

Post by Spirit Rider » Sat Apr 07, 2018 10:40 am

:sharebeer Inheritance and current tax liability are two separate things.

There is not much they can do about current RMDs except taking current distributions, doing Roth conversions or using QCDs for charitable giving to reduce their tax liability. They just have to see what the trade off is in current vs. future taxation of Roth conversions and act accordingly.

It is not possible to gift retirement accounts while alive to avoid taxation. They can gift out of any distributions, but that is after-tax. What they can be is be smart about their beneficiary designations. First is to make SURE that all retirement accounts have primary and contingent beneficiaries and NOT the estate.

Normally, you would make a spouse a primary beneficiary and someone else a contingent beneficiary. However, with the assets each spouse has, I would not bother. I would prioratize the grandchildren over the children for retirement plan assets. They would have a longer time horizon for lifetime distributions.

If you prioratize the retirement accounts for the grandchildren, you should prioratize the taxable accounts and real property for the children.

Calling Gill and Bruce Steiner.

At the dollars involved it is probably highly beneficial to have trusts for all the children and grandchildren to protect the assets from creditors and spouses.

This is clearly a case where it is mandatory to engage a competent estate attorney and draft a comprehensive estate plan.

ionball
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Re: What is the best way to inherit a large IRA amount

Post by ionball » Sat Apr 07, 2018 10:58 am

Consider Qualified Charitable Distributions. That's a good technique to control RMD taxation.

mhalley
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Re: What is the best way to inherit a large IRA amount

Post by mhalley » Sat Apr 07, 2018 11:04 am

You might look into the Lange cascading beneficiary plan.

http://paytaxeslater.com/category/estat ... iary-plan/

rkhusky
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Re: What is the best way to inherit a large IRA amount

Post by rkhusky » Sat Apr 07, 2018 11:07 am

Unless there is another source of income, it looks like your parents would be in the 22% tax bracket with just the RMD's. That's sort of an average tax bracket. And the next tax bracket up is only 24%, which is also average. I wouldn't characterize that as generating a very large tax bill.

They could do Roth conversions up to the top of the 22% bracket or to the top of the 24% bracket. Doing Roth conversions to prevent entering deep into the 32% bracket if one of them passes away might be a good strategy.

One way to avoid stressing over the taxes is remembering all the tax savings they enjoyed while contributing.

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Watty
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Re: What is the best way to inherit a large IRA amount

Post by Watty » Sat Apr 07, 2018 11:38 am

One thing to remember is that if they have to take an unneeded RMD and they do not spend or give the money away then the money will just be invested in their taxable account. That could grow for years then be eventually inherited by someone at a stepped up cost basis under the current tax laws. The tax advantages of them getting it at a stepped up cost basis is worth a lot and will at least partially offset any taxes they pay now. That is almost as good as a Roth, except the person who inherits it would not get future tax advantages.

Another consideration is that as they age they may have high deductible medical expenses if they need a nursing home so some of the future RMD's might not be taxed as much.
Spirit Rider wrote:
Sat Apr 07, 2018 10:40 am
Normally, you would make a spouse a primary beneficiary and someone else a contingent beneficiary. However, with the assets each spouse has, I would not bother. I would prioratize the grandchildren over the children for retirement plan assets. They would have a longer time horizon for lifetime distributions.
+1

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CAsage
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Re: What is the best way to inherit a large IRA amount

Post by CAsage » Sat Apr 07, 2018 1:07 pm

Of course, if your parents leave their IRAs to many people, the amount would be divided up. And if those beneficiaries were unemployed, they could take the money out at the very lowest tax bracket. Note that I'm not recommending this - it is just the lowest tax hit!

Seriously, your parents are VERY well off, and of course all that IRA was invested pretax and grew tax free. You would be lucky to pull it out at anything in the 24% or less tax bracket. Suggest you take a hard look at the future tax brackets of the most likely heirs (direct children) and the parents... Maybe converting to a Roth and taking the hit now would be worthwhile? Taxes are relatively lower now (and the next ~6 years) than they may be in the future.... There is no way to avoid paying taxes - IRA money is not truly all yours.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

bsteiner
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Location: NYC/NJ/FL

Re: What is the best way to inherit a large IRA amount

Post by bsteiner » Sat Apr 07, 2018 8:58 pm

Spirit Rider wrote:
Sat Apr 07, 2018 10:40 am
... Calling Gill and Bruce Steiner. ...
Thanks for the mention.

They might do Roth conversions to the top of the 24% bracket, assuming they have cash or high basis assets outside the IRA to pay the tax on the conversion.

To the extent the children won't need the IRAs, they could leave them in trust for the grandchildren.

They could keep it flexible by naming the spouse as the primary beneficiary, trusts for the children as the first contingent beneficiaries, and trusts for the grandchildren as the second contingent beneficiaries, so if a child disclaims, his/her share goes to his/her children, in separate trusts for their benefit.

It would help to know whether there are any state estate tax considerations that might affect the planning.

Also note that there's no portability for GST tax purposes, but given the size of the estates this may not be an issue even after 2025 when the estate and gift tax exclusion amount and the GST exemption reverts to prior law.

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