Trustee for mom's estate: large reserve recommended

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unclemilty
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Trustee for mom's estate: large reserve recommended

Post by unclemilty » Thu Jun 21, 2018 8:05 pm

Hi there. My mom recently passed away. She left an estate worth $1m. The estate is expecting to pay about $58k in taxes on annuity disbursements in tax year 2018. My mother lived a pretty simple life and there are no other hidden expenses that we see besides taxes.

My mom's accountant is recommending that the trust disburse 50% of assets now, and a further 25% in a year, with the balance to follow. She is concerned about taxes, and audit expenses if they occur.

I was expecting to hold back a significantly smaller sum (like estimated taxes plus $10k or $20k). Does anyone have any advice on this matter? Also, if we do hold back such a large sum, any suggestions where it ought to be getting the best yield -- a CD, or ST bond fund?

bsteiner
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Re: Trustee for mom's estate: large reserve recommended

Post by bsteiner » Thu Jun 21, 2018 9:58 pm

What does the lawyer recommend?

How did she leave her estate?

What are the potential liabilities?

Did she own a home, or any other real estate, or any business interests?

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Pajamas
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Re: Trustee for mom's estate: large reserve recommended

Post by Pajamas » Thu Jun 21, 2018 10:29 pm

Those sound like legitimate concerns to me. If I trusted the accountant enough to hire her in the first place, I would trust her on this.

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Peter Foley
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Re: Trustee for mom's estate: large reserve recommended

Post by Peter Foley » Thu Jun 21, 2018 10:58 pm

It would be helpful to know a bit more about the annuity. Was it a "qualified annuity" (pre-tax/IRA), or was it an after tax annuity?

Are there multiple recipients?

unclemilty
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Re: Trustee for mom's estate: large reserve recommended

Post by unclemilty » Fri Jun 22, 2018 2:35 am

The annuity is taxable. There are 4 heirs total. I do not have an attorney. The estate is fairly simple. She sold a home several years before and had no debts or bills that I have found.

I do appreciate the perspective so far. My thanks to you all.

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celia
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Re: Trustee for mom's estate: large reserve recommended

Post by celia » Fri Jun 22, 2018 3:51 am

unclemilty wrote:
Thu Jun 21, 2018 8:05 pm
Hi there. My mom recently passed away. She left an estate worth $1m. The estate is expecting to pay about $58k in taxes on annuity disbursements in tax year 2018.
I'm having a hard time understanding the tax consequences here and how taxes can be $58K for this year. It seems the worst case would be that her entire estate is in the annuity/tax-deferred account and that every dollar withdrawn is taxed like ordinary income. Even if she died at age 90, her RMDs would now be up to about 10% (of the million dollars). So, how can $100K of income (the RMD) cause a tax liability of 58K?

Second, if you dispersed most of it now while dividing everything into fourths, each person would get less than $250K. Is the tax-deferred part of this eligible to be rolled into Inherited IRAs for each beneficiary? Each beneficiary would have to start taking RMDs in the year after death, but the percentage to be withdrawn each year is much less that what your mom was taking.
My mom's accountant is recommending that the trust disburse 50% of assets now, and a further 25% in a year, with the balance to follow. She is concerned about taxes, and audit expenses if they occur.
I would start by making sure you understand the tax consequences properly. I wonder if the accountant does, too. Not all accountants prepare income taxes, but a consultation should be sought with someone who is knowledgeable about taxes on an estate like this. A second opinion can't hurt.

carolinaman
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Re: Trustee for mom's estate: large reserve recommended

Post by carolinaman » Fri Jun 22, 2018 7:08 am

I was executor of my mother's estate which was much smaller than yours. Her lawyer advised me to withhold the majority of estate funds for a year. This did not make my sisters happy but I was the one who was responsible for the estate. Once you disburse the funds, getting them back would be very difficult if not impossible. Your original plan is probably correct 98% of the time, but there is the chance of some unexpected liability. It is best to be cautious.

Gill
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Re: Trustee for mom's estate: large reserve recommended

Post by Gill » Fri Jun 22, 2018 7:22 am

Is this being recommended for income tax planning purposes? If a distribution is made this year it would appear the income you mention would be taxed to the beneficiaries rather than the estate. Does that appear desirable?
Gill

Jablean
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Re: Trustee for mom's estate: large reserve recommended

Post by Jablean » Fri Jun 22, 2018 7:37 am

Gill wrote:
Fri Jun 22, 2018 7:22 am
Is this being recommended for income tax planning purposes? If a distribution is made this year it would appear the income you mention would be taxed to the beneficiaries rather than the estate. Does that appear desirable?
Gill
I don't think the OP has a choice in this. My mom died at the end of last year before her RMDs were taken for the year. The RMDs taken after her death (in my case all of them) will be taxed to the heirs (myself).

OP With annuities, was your mom withdrawing from all of them? My mother had multiple annuities, one in a Roth, one in an IRA and then also had IRA investments elsewhere. She took her combined IRA RMDs from the just the non- annuity account. Her financial advisors had me take a RMD from the IRA annuity and that cancelled the death benefit for me so I actually got 4-5000 less than I would have. (the tax hit on not taking the RMD would have only been about 1500. Just something to think about.

My mom's estate was simple and smaller but is still taking a year to complete. I have dispersed about half of the money 8 months in and the lawyer is having me keep the other half until the end and we wrap it up.

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Re: Trustee for mom's estate: large reserve recommended

Post by Gill » Fri Jun 22, 2018 7:43 am

Jablean wrote:
Fri Jun 22, 2018 7:37 am
Gill wrote:
Fri Jun 22, 2018 7:22 am
Is this being recommended for income tax planning purposes? If a distribution is made this year it would appear the income you mention would be taxed to the beneficiaries rather than the estate. Does that appear desirable?
Gill
I don't think the OP has a choice in this. My mom died at the end of last year before her RMDs were taken for the year. The RMDs taken after her death (in my case all of them) will be taxed to the heirs (myself).

OP With annuities, was your mom withdrawing from all of them? My mother had multiple annuities, one in a Roth, one in an IRA and then also had IRA investments elsewhere. She took her combined IRA RMDs from the just the non- annuity account. Her financial advisors had me take a RMD from the IRA annuity and that cancelled the death benefit for me so I actually got 4-5000 less than I would have. (the tax hit on not taking the RMD would have only been about 1500. Just something to think about.

My mom's estate was simple and smaller but is still taking a year to complete. I have dispersed about half of the money 8 months in and the lawyer is having me keep the other half until the end and we wrap it up.
I think you missed the point. We are talking about distributing estate assets, not tax sheltered accounts.
Gill

stan1
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Re: Trustee for mom's estate: large reserve recommended

Post by stan1 » Fri Jun 22, 2018 7:47 am

It is normal (and generally wise) for an accountant to give conservative advice in a situation like this. It's a lot easier to withhold distributions than it is to realize too much was distributed, especially if four heirs are involved.

As the executor I would leave cash assets in an FDIC insured account. Even if you have good relations with the other three heirs now you don't want any loss of principal to later cause family friction or resentment.

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Re: Trustee for mom's estate: large reserve recommended

Post by mouses » Fri Jun 22, 2018 7:52 am

I would make sure your accountant is experienced in estate (and trust?) matters, and I would make sure you understood why she is saying what she is. Off the top of my head, I would not disburse such a large amount up front. As said by someone above, you can always disburse later, getting it back is something else. There can be unexpected claims on the estate and mistakes.

Gill
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Re: Trustee for mom's estate: large reserve recommended

Post by Gill » Fri Jun 22, 2018 9:06 am

Just as an aside, making an excess distribution of an estate and trying to reclaim it can be a serious mistake. I once was assigned an estate to administer which had been handled by another officer who retired before completion of the administration. The widow's share was based on a formula giving her 1/3 of the net estate. The widow, a very attractive 36 year old, had charmed and pestered the former officer to maximize distributions during the estate administration and he had distributed what he thought was somewhat less than her 1/3 share.

When I became involved I determined he had distributed too much and she owed the estate a significant amount of money. In the meantime the widow had spent everything she received and I had to prevail upon our bank's loan department to lend her the money to repay the estate. She was not a happy camper and badmouthed the bank all over town. It was quite early in my career, but a lesson that stuck with me for the years after.

Gill

afan
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Re: Trustee for mom's estate: large reserve recommended

Post by afan » Fri Jun 22, 2018 9:39 am

I have a relative who distributed too much. Found out that taxes and final bills were more than what was left. Had to make up the difference out of pocket. Relative was lucky that all the people who had received more than the should have eventually returned the excess. Could have been ugly otherwise.
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Pajamas
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Re: Trustee for mom's estate: large reserve recommended

Post by Pajamas » Fri Jun 22, 2018 9:44 am

afan wrote:
Fri Jun 22, 2018 9:39 am
I have a relative who distributed too much. Found out that taxes and final bills were more than what was left. Had to make up the difference out of pocket. Relative was lucky that all the people who had received more than the should have eventually returned the excess. Could have been ugly otherwise.
It's certainly a situation in which someone could say, "No, you made the mistake, you will have to pay it out of your share. I didn't have any input on how to manage the estate and I already spent all of the money that I received."

Gill
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Re: Trustee for mom's estate: large reserve recommended

Post by Gill » Fri Jun 22, 2018 10:22 am

Pajamas wrote:
Fri Jun 22, 2018 9:44 am

It's certainly a situation in which someone could say, "No, you made the mistake, you will have to pay it out of your share. I didn't have any input on how to manage the estate and I already spent all of the money that I received."
Of course, they could be sued by the executor.
Gill

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Pajamas
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Re: Trustee for mom's estate: large reserve recommended

Post by Pajamas » Fri Jun 22, 2018 10:28 am

Gill wrote:
Fri Jun 22, 2018 10:22 am
Pajamas wrote:
Fri Jun 22, 2018 9:44 am

It's certainly a situation in which someone could say, "No, you made the mistake, you will have to pay it out of your share. I didn't have any input on how to manage the estate and I already spent all of the money that I received."
Of course, they could be sued by the executor.
Gill
Yes, and those expenses would exacerbate the situation further.

Do you agree that it's generally best to be conservative about paying out an estate or trust?

Gill
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Re: Trustee for mom's estate: large reserve recommended

Post by Gill » Fri Jun 22, 2018 10:44 am

Pajamas wrote:
Fri Jun 22, 2018 10:28 am
Do you agree that it's generally best to be conservative about paying out an estate or trust?
Absolutely! As I described above, it is best to be conservative in making estate distributions. The consequences of not maintaining a sufficient reserve can be serious.
Gill

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celia
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Re: Trustee for mom's estate: large reserve recommended

Post by celia » Fri Jun 22, 2018 12:59 pm

unclemilty wrote:
Thu Jun 21, 2018 8:05 pm
Also, if we do hold back such a large sum, any suggestions where it ought to be getting the best yield -- a CD, or ST bond fund?
Near the end of the year, I would put the holdback in cash if it looks like the estate could be closed out in 2019. If the estate gets interest or dividends in 2019, then you will have to pay taxes again for 2019 plus tax preparation fees

The first things to be distributed this year should be the IRAs or other retirement accounts. You and the other heirs need to understand the correct way for the accounts to be titled so they can stretch out the RMDs, if they so desire.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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mhadden1
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Re: Trustee for mom's estate: large reserve recommended

Post by mhadden1 » Fri Jun 22, 2018 1:21 pm

celia wrote:
Fri Jun 22, 2018 3:51 am
unclemilty wrote:
Thu Jun 21, 2018 8:05 pm
Hi there. My mom recently passed away. She left an estate worth $1m. The estate is expecting to pay about $58k in taxes on annuity disbursements in tax year 2018.
I'm having a hard time understanding the tax consequences here and how taxes can be $58K for this year.
I too am interested in how such a large tax event could be generated. If the OP could provide more info about that, it would be educational for me and no doubt for others.
Oh I can't, can I? That's what they said to Thomas Edison, mighty inventor, Thomas Lindberg, mighty flyer,and Thomas Shefsky, mighty like a rose.

mouses
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Re: Trustee for mom's estate: large reserve recommended

Post by mouses » Fri Jun 22, 2018 9:46 pm

celia wrote:
Fri Jun 22, 2018 12:59 pm
Near the end of the year, I would put the holdback in cash if it looks like the estate could be closed out in 2019. If the estate gets interest or dividends in 2019, then you will have to pay taxes again for 2019 plus tax preparation fees
Near closing out my Mom's estate/trust, I had the holdback in a non-interest earning account.

NancyABQ
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Re: Trustee for mom's estate: large reserve recommended

Post by NancyABQ » Fri Jun 22, 2018 9:57 pm

mouses wrote:
Fri Jun 22, 2018 9:46 pm
celia wrote:
Fri Jun 22, 2018 12:59 pm
Near the end of the year, I would put the holdback in cash if it looks like the estate could be closed out in 2019. If the estate gets interest or dividends in 2019, then you will have to pay taxes again for 2019 plus tax preparation fees
Near closing out my Mom's estate/trust, I had the holdback in a non-interest earning account.
Same here. I kept some money set aside for any remaining expenses, into the next tax year. But I put it in a non-interest-bearing account, to keep tax consequences simple (there were none). I think I kept ~$20K for this, but the amount would depend totally on circumstances. This was recommended to me by our accountant as the best way to handle it, and it worked out well.

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