Your Plans on Tax Efficient Ways To Pass Through Assets To Children

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
MrCheapo
Posts: 424
Joined: Tue Dec 22, 2020 3:43 pm

Your Plans on Tax Efficient Ways To Pass Through Assets To Children

Post by MrCheapo »

Based on my numbers I'll pass along a decent amount of assets to my children, very likely 7 figures.

But I want to do this in the most tax efficient way of course. I'd like to hear other people's plans and most importantly the possible risks they see and mitigation strategies.

My plan is to pass along my share portfolio (about $500K) and left overs of my Vanguard after-tax account (likely $500K). Since both of these are after tax they'll get the stepped up basis which is a huge deal because the share portfolio has a cost basis of $100K and hte Vanguard funds basis is $200K.

I also intend to pass along the Roth IRA which will have $500K invested. I don't intend to have much money left in my tIRA. I'll also pass along what-ever property we are living in, most likely to be worth about $500K.

The biggest challenge I see is I've made the assumption that the stepped up cost basis rule remains intact. If it does not then they'll owe huge amounts of capital gains on about $700K. I don't have a mitigation strategy for this at all.
User avatar
gasman
Posts: 849
Joined: Mon Jul 30, 2007 6:13 pm

Re: Your Plans on Tax Efficient Ways To Pass Through Assets To Children

Post by gasman »

If they are in a low tax bracket now you can start gifting assets with high unrealized gains to them now and have them sell just enough to not push them into higher bracket(s).
Last edited by gasman on Mon Sep 13, 2021 1:56 pm, edited 1 time in total.
User avatar
arcticpineapplecorp.
Posts: 8571
Joined: Tue Mar 06, 2012 9:22 pm

Re: Your Plans on Tax Efficient Ways To Pass Through Assets To Children

Post by arcticpineapplecorp. »

if the rule on step up basis ever changes, i'm sure lawyers will come up with new products (trusts) to help the situation. Until then, I don't think there's anything necessarily to do. You've done everything you can unless there's some kind of trust I'm not aware of that reduces/eliminates taxes which seems to be your main concern (tax implication for heirs).

You haven't mentioned any tax deferred accts. If you have those, you could do Roth conversions to leave more money tax free for heirs.

As was said, you could gift money while alive if concerned about losing step up in basis, which is unknown and therefore far from certain.
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events.
User avatar
Wiggums
Posts: 4240
Joined: Thu Jan 31, 2019 8:02 am

Re: Your Plans on Tax Efficient Ways To Pass Through Assets To Children

Post by Wiggums »

Gifting

Roth IRA Conversions

Looking into Grantor Retained Annuity Trust (GRAT)
Investors need to be better informed about the costs they pay. “High fund fees can be hazardous to your wealth in the same way that high calories can be hazardous for your health.”
afan
Posts: 6254
Joined: Sun Jul 25, 2010 4:01 pm

Re: Your Plans on Tax Efficient Ways To Pass Through Assets To Children

Post by afan »

You are in good shape for the current tax laws. Pointless to make plans for future changes in the law since no one knows what they may be or when they might happen.
IF the laws change, then adjust your plans accordingly when it happens.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
Topic Author
MrCheapo
Posts: 424
Joined: Tue Dec 22, 2020 3:43 pm

Re: Your Plans on Tax Efficient Ways To Pass Through Assets To Children

Post by MrCheapo »

afan wrote: Mon Sep 13, 2021 8:45 am You are in good shape for the current tax laws. Pointless to make plans for future changes in the law since no one knows what they may be or when they might happen.
IF the laws change, then adjust your plans accordingly when it happens.
Thanks, so my plan of spending down the tIRA for my costs is a good idea right? It seems that it's much more preferable to pass along wealth in after-tax accounts because with the tIRA the kids will have to liquidate within 10 years AND pay income tax on it.
User avatar
JDCarpenter
Posts: 1610
Joined: Tue Sep 09, 2014 2:42 pm

Re: Your Plans on Tax Efficient Ways To Pass Through Assets To Children

Post by JDCarpenter »

MrCheapo wrote: Mon Sep 13, 2021 12:07 pm ...
Thanks, so my plan of spending down the tIRA for my costs is a good idea right? It seems that it's much more preferable to pass along wealth in after-tax accounts because with the tIRA the kids will have to liquidate within 10 years AND pay income tax on it.
Generally, that is true. Unless you have higher income tax rate in retirement than your kids are likely to have at your death. We are of the same opinion as you. Thus, we have been aggressively converting to Roth since retirement, and after exhausting all regular taxable accounts, spending only from the tIRAs. We intend to continue on that path as we age--or at least until we get the tIRAs into a range sufficiently small to cover charitable contributions and end-of-life medical bills or the like. (We were extremely tIRA heavy at retirement, and are likely to always be overweighted in that direction, so YMMV.)
Edit Signature
afan
Posts: 6254
Joined: Sun Jul 25, 2010 4:01 pm

Re: Your Plans on Tax Efficient Ways To Pass Through Assets To Children

Post by afan »

MrCheapo wrote: Mon Sep 13, 2021 12:07 pm
afan wrote: Mon Sep 13, 2021 8:45 am You are in good shape for the current tax laws. Pointless to make plans for future changes in the law since no one knows what they may be or when they might happen.
IF the laws change, then adjust your plans accordingly when it happens.
Thanks, so my plan of spending down the tIRA for my costs is a good idea right? It seems that it's much more preferable to pass along wealth in after-tax accounts because with the tIRA the kids will have to liquidate within 10 years AND pay income tax on it.
Right. You say the tIRA is a small amount and you plan to spend it. Depending on your current tax rates, how much is left and your age, you might use some of your taxable and Roth to limit your tIRA withdrawals to minimize taxes paid. Then you heirs might be able to take out the tIRA at low tax rates, if they otherwise would have low rates.

But if the amount in tax deferred is small, then you may not have much to accomplish by optimizing here.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
secondcor521
Posts: 179
Joined: Wed Sep 10, 2014 4:11 pm

Re: Your Plans on Tax Efficient Ways To Pass Through Assets To Children

Post by secondcor521 »

Couple of thoughts/comments:

Roth IRAs are also impacted by the SECURE Act, so they generally need to be drained by the end of the year containing the 10th anniversary of death. Of course, generally this is tax-free income, but there is still the loss of the tax-free compounding within the Roth.

Besides federal estate taxes, some states have estate taxes with lower exemption amounts than the current federal amount. Some states also impose inheritance taxes on the heirs. You may want to investigate if your state has such laws, and consider them in where you plan to live.

There is a proposal currently in Congress to lower the estate tax exemption amount to $5M. This may impact what you do.

You can do annual gifting of $15K per giver/receiver combination each year without eating into your lifetime exclusion. On top of that, you can pay some college and medical expenses without eating into either the $15K number or your lifetime exclusion.

QCDs on top of IRAs can get rid of assets in a tax efficient manner - so do any charitable giving that way, which leaves other money available to go to your kids.

If you're married, consider either a bypass trust or filing for DSUEA when the first spouse passes away.

If your kids might end up rich as a result, and they have kids by the time you pass away, they could look at disclaimers. Disclaimers may get the GST involved.
afan
Posts: 6254
Joined: Sun Jul 25, 2010 4:01 pm

Re: Your Plans on Tax Efficient Ways To Pass Through Assets To Children

Post by afan »

Omit any consideration of possible future tax changes.
Note that under CURRENT law, the federal estate tax exemption will go down in 2026. Nothing speculative about that.

If you can afford it, you can make gifts above the $15,000 limit now. You do not have to pay tax on these gifts until they total more than the exclusion amount. You do have to file a gift tax return. Doing this gets future growth in the accounts out of your estate. The longer you are likely you live after the gift the more there is to gain by making the gifts now.

To the extent possible give away assets with high basis - cash is perfect. Bond funds that have paid out any realized capital gains. High basis stocks or stock funds. If you have only low basis assets, compare your tax rate to that of your heirs to decide who is better off realizing the gains. In general, the low basis investments should be held 'til death to get the step up.
If your heirs are unlikely to ever to need some or all the money, then consider gifts to or on behalf of grandchildren.

Make moves until you are guided by an attorney who is expert in estate planning. The rules get complicated quickly and you could waste a lot of money by getting it wrong.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
User avatar
Nate79
Posts: 7458
Joined: Thu Aug 11, 2016 6:24 pm
Location: Delaware

Re: Your Plans on Tax Efficient Ways To Pass Through Assets To Children

Post by Nate79 »

Hopefully you live so long that the tax law changes so many times all of your well thought out plans will likely all need to be modified.
WhiteMaxima
Posts: 2419
Joined: Thu May 19, 2016 5:04 pm

Re: Your Plans on Tax Efficient Ways To Pass Through Assets To Children

Post by WhiteMaxima »

Life has to be earned. I am not planning pass asset to chidren to bu facncy cars and vacation. But I will set aside 529 fund for future generation education.
Phil DeMuth
Posts: 189
Joined: Thu Mar 06, 2008 7:02 pm

Re: Your Plans on Tax Efficient Ways To Pass Through Assets To Children

Post by Phil DeMuth »

In addition to the good ideas mentioned here:

1) Rich people pass along their human capital to their children by investing heavily in their educations. This is can be tax-free or tax-advantaged.

2) Rich people pass along their social capital in the form of personal contacts and connections. This is untaxed but very important. People often get jobs or advance in jobs because they are friends with the right person, for example.

3) Properly set up, you can loan money to children who can use it for worthwhile purposes, for example, in buying a house or setting up an investment portfolio. You get a small annual loan interest payment and they get to control a much larger sum and benefit from the long-term returns from the investment they make.
QBoy
Posts: 129
Joined: Sun May 05, 2013 7:09 am

Re: Your Plans on Tax Efficient Ways To Pass Through Assets To Children

Post by QBoy »

I have set up a dynasty trust that slowly doles the money out over time--actually, on a monthly basis--to all my descendants, born and yet to be born. The trust is designed to protect them from their own profligacy and from creditors, including ex-spouses. It also protects the pot of money from having to incur the estate tax at the end of every generation. Maybe those protections will be unnecessary, but it is hard to predict what might occur down the road.

It is like a fully-funded UBI program, but not universal.
bsteiner
Posts: 6106
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: Your Plans on Tax Efficient Ways To Pass Through Assets To Children

Post by bsteiner »

QBoy wrote: Wed Sep 15, 2021 11:04 am I have set up a dynasty trust that slowly doles the money out over time--actually, on a monthly basis--to all my descendants, born and yet to be born. The trust is designed to protect them from their own profligacy and from creditors, including ex-spouses. It also protects the pot of money from having to incur the estate tax at the end of every generation. Maybe those protections will be unnecessary, but it is hard to predict what might occur down the road.
...
In trust for the reasons you mentioned, but fully discretionary trusts since no one knows what the future will bring.
Lee_WSP
Posts: 5732
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Your Plans on Tax Efficient Ways To Pass Through Assets To Children

Post by Lee_WSP »

So long as you pass with relatively little left in a tax deferred account and you're under the exemption, there is next to no tax planning to be done. Plenty of other considerations, but taxes have been pushed very far down the list.
Post Reply