Tax strategies and advice for inherited IRA, stocks and real estate

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rjc32000
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Tax strategies for inherited retirement accounts, real estate and stocks

Post by rjc32000 »

My dad passed away recently after living a long and rewarding life. He was not rich but is leaving my brother and I substantial addition to our present savings. I'm looking for tax strategies and answers to some general questions. We fortunately live in a state with no taxes, so assume my tax questions relate to federal taxes.

1. My dad's IRA. I assume there is no way for my brother and I to magically transfer this money into our own tax-advantaged retirement accounts, and that we will owe taxes on the money we inherit. Are there strategies available to minimize the tax burden?

2. My dad's will directs that his estate is to be split 50/50, but assume my brother is in a much higher tax bracket than I am: do we do the 50/50 split of IRA on pre or post tax value? Assume that I like paying taxes as little as anyone and want to do whatever I lawfully can do to minimize taxes.

3. My dad's home owned free and clear: I understand that current tax law establishes a stepped up basis for his home. When and how is this value established? I mean, he hasn't had an appraisal done since he purchased the property over 30 years ago. So how is the step-up basis value determined? What if my brother and I paint the house before putting it on the market? Or install a new furnace and water heater? Will we be liable for taxes on the (presumably) increased value of home? And again, how is all of this determined?

4. Assume that I decide to keep the house; the will directs that my father's liquid assets be used to even out the 50/50 split, so presumably we'd use the money from the IRA to offset the value of the house if that makes sense; I'd "buy out" my brother's share of the house by giving him a larger share of the IRA. Does he then owe taxes on all that he receives? It seems like I'd be getting a tax windfall and would wind up with something I could sell tax free the next day while my brother paid a big tax bill. Any suggestions how to make this as fair and equitable as possible for all involved?

Thanks in advance.
mhalley
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Re: Tax strategies for inherited retirement accounts, real estate and stocks

Post by mhalley »

1. You now have to take out the money in an Inherited IRA by 10 years. The most tax effecient way would be to do that yearly with the goal of it being depleted by the 10 year mark.
2. If the will doesn't specify, then its 50/50.
3. To get the step up in basis of the home, have it appraised. I suppose you could have it remodeled before the appraisal to increase the price, but not sure it that is "legal". If you sell it within a year, that is probably close enough. If you have it appraised, the realtor could tell you whether doing some remodeling would result in a higher price or you should sell it as is.
4. Your brother wouldn't owe taxes on the IRA money until he takes it out, but it is a factor. If the will specifies 50/50 split, you could certainly take taxes into account, but perhaps to be fair there should be a clause about what happens if you decide to sell the house within a certain time frame. I imagine the probate judge will decide if an unequal spit follows the spirit of the will.
As always, get real legal advice rather than from someone who hasn't even slept at a Holiday Inn recently.
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FiveK
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Re: Tax strategies and advice for inherited IRA, stocks and real estate

Post by FiveK »

Condolences to you and your family on your father's passing.

1. See IRA Inheritance: Non-Spouse IRA Beneficiary for one discussion of options. The current version of Publication 590-B (2019), Distributions from Individual Retirement Arrangements (IRAs) | Internal Revenue Service does not include SECURE Act changes, but will in the 2020 version.

2. If he named beneficiaries on the account, that will override the will. IANAL but if the instructions simply say "50/50 split" that implies "of the current balance." Determining what tax rate to use, even if one wanted to do so, could be problematic.

3. Get appraisals from a couple of realtors for Fair Market Value. That becomes the basis. Selling expenses and capital improvements will add to that basis. See Inherited house basis calculation with no appraisal at time of death. Property tax laws vary - you would have to check on those in his area.

4. Any non-IRA "liquid assets," e.g., bank accounts, taxable investments, etc.? Applying those before any IRA split seems reasonable.

Again, condolences and best wishes for all concerned.
DarthSage
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Re: Tax strategies and advice for inherited IRA, stocks and real estate

Post by DarthSage »

1. You're right--you can't just magically transfer Dad's IRA to yours/your brother's. Check the link the PP gave--the SECURE Act changed the laws on this. On the good side, you have 10 years to liquidate the IRA--your call on if it's better to do it this year, 1/10 each year, wait until 9 years and 364 days, whatever.

2. Splitting the estate generally doesn't take into account the taxes that might be owed by the recipients. We did this with MIL's estate--it was right down the middle. At one point, BIL got an extra penny ("Mom always did like you best!"). There shouldn't be much tax owed, outside the IRA dealings.

3. Have the house appraised as-is. That will be your stepped-up basis. If you agree on minor improvements, you make them, you pay for them, you pay taxes on any increase in price they provide.

4. Assuming there are no other liquid assets, I would work on an equitable arrangement with your brother on its value. In addition:

You didn't ask, but an estate attorney can really help you with these things. We found ours invaluable, as she knew all the laws, had an in-house accountant for filing final tax forms, etc. What is a new, one-time event for you, will be a regular occurrence for him/her. Your goal shouldn't be to spend as little as possible, but to keep both you and your brother feeling like you got a fair deal. Family harmony is priceless.
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grabiner
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Re: Tax strategies for inherited retirement accounts, real estate and stocks

Post by grabiner »

You cannot magically transfer the IRA to your own retirement account. However, if you aren't maxing out your 401(k), you can withdraw from the IRA and contribute an equal amount to your 401(k), which is tax-neutral, as you get the same income on the withdrawal and deduction on your contribution.

The other strategy to minimize the tax burden is to spread the withdrawals over the allowed 10 years. If you have $500K in the account, you would rather withdraw $50K every year for ten years (plus any growth on that $50K, so it will be more in later years), rather than $500K plus ten years of growth in ten years.
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trueblueky
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Re: Tax strategies for inherited retirement accounts, real estate and stocks

Post by trueblueky »

rjc32000 wrote: Fri Oct 16, 2020 9:01 pm 1. My dad's IRA. I assume there is no way for my brother and I to magically transfer this money into our own tax-advantaged retirement accounts, and that we will owe taxes on the money we inherit. Are there strategies available to minimize the tax burden?
Correct. The assets go into two inherited IRAs, one each. You have 10 years to withdraw the funds. The simple solution would be to take 1/10 next year, 1/9 of the balance the next year, etc.

If you are not maxing your retirement accounts, you could take a distribution from the inherited IRA to fund your traditional IRA or 401k. Net, no tax.
2. My dad's will directs that his estate is to be split 50/50, but assume my brother is in a much higher tax bracket than I am: do we do the 50/50 split of IRA on pre or post tax value? Assume that I like paying taxes as little as anyone and want to do whatever I lawfully can do to minimize taxes.
You can disclaim any or all of the inheritance.
3. My dad's home owned free and clear: I understand that current tax law establishes a stepped up basis for his home. When and how is this value established? I mean, he hasn't had an appraisal done since he purchased the property over 30 years ago. So how is the step-up basis value determined? What if my brother and I paint the house before putting it on the market? Or install a new furnace and water heater? Will we be liable for taxes on the (presumably) increased value of home? And again, how is all of this determined?
The basis of the house is its value on the date of death. If you install a new furnace and water heater after inheriting, those add to the basis. Painting and general cleanup do not.

See IRS Publication 523, Selling Your Home, for a list of improvements that add to the basis.

If the home is sold not long after you receive it, you may find you show a loss after accounting for the deductible closing costs.
4. Assume that I decide to keep the house; the will directs that my father's liquid assets be used to even out the 50/50 split, so presumably we'd use the money from the IRA to offset the value of the house if that makes sense; I'd "buy out" my brother's share of the house by giving him a larger share of the IRA. Does he then owe taxes on all that he receives? It seems like I'd be getting a tax windfall and would wind up with something I could sell tax free the next day while my brother paid a big tax bill. Any suggestions how to make this as fair and equitable as possible for all involved?
Are there assets outside the house and IRA? I would use those to buy out your brother. You are correct that the money in the IRA has less value than the same money elsewhere.

Made-up numbers:
House worth $200,000
IRA worth $200,000
$200,000 in taxable bank and broker accounts, CDs, etc.
Brother 1 is in 12% marginal tax bracket; brother 2 is in 37% marginal.

1/2 the house is worth $100,000 to each
1/2 the taxable accounts is worth $100,000 each
1/2 the IRA is worth $88,000 to brother 1 and $63,000 to brother 2.

If brother 2 is in a higher tax bracket (presumably because of higher income), he may be fine with that.

If the house is sold, the proceeds become part of the taxable account, maybe with a small capital gain or loss. Inherited property is long-term by definition.

---

If you buy his half of the house, I would definitely appraise it to establish the basis and fair sales price. If there is enough money in your half of taxable accounts, using those would be better from a tax standpoint.

Brother 1 gets $200,000 house plus $100,000 inherited IRA. Brother 2 gets $200,000 in taxable account plus $100,000 inherited IRA.
---
Assuming the only assets are house and IRA and you want the house.

$200,000 house to brother 1
$200,000 inherited IRA to brother 2 ($124,000 after tax) -- this is the scenario you want to avoid. When split evenly, the IRS was worth $151,000 after tax.

---
$200,000 inherited IRA to brother 1 ($176,000 after tax)
$200,000 house to brother 2
Brother 2 sells house to brother 1 at fair market price on installment loan (have a professional draft it). Brother 1 uses IRA each year to make the loan payment. Some of the payment will be taxable interest.

Maybe. Have a smart person run the actual numbers.
theresearcher
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Re: Tax strategies for inherited retirement accounts, real estate and stocks

Post by theresearcher »

Not possible to give any meaningful comments regarding the IRA balance unless you can clarify did your father name beneficiaries on the IRA.

If yes, then the IRA gets split based on the beneficiary nomination (each gets an Inherited IRA- normally must be drawn down within 10 years) and the IRA balance is excluded from the provisions of the will.

If no, then the IRA balance may have to pass through the estate and the distribution will be subject to the will/probate process. It is not clear if the benefits of tax deferral up to 10 years can be retained in that situation.
theresearcher
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Re: Tax strategies and advice for inherited IRA, stocks and real estate

Post by theresearcher »

IRA assets should follow beneficiary nominations (and excluded from the will)- only if no beneficiary nomination was made should the IRA balance be included in the estate.
Last edited by theresearcher on Sat Oct 17, 2020 6:28 pm, edited 1 time in total.
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Re: Tax strategies and advice for inherited IRA, stocks and real estate

Post by LadyGeek »

^^^ The OP had a duplicate thread, which I merged into here. I then removed the OP's duplicate post. The combined thread is in the Personal Finance (Not Investing) forum (tax strategy).
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