Planning for eventual inherited accounts

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OnTopOfaStack
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Planning for eventual inherited accounts

Post by OnTopOfaStack » Mon Jun 29, 2020 10:36 am

Greeting Bogleheads,
I have received great responses and advice previously, so I am looking for advice to put a plan in place for accounts I will eventually have to deal with.

My mother is in her early 90's and has a terminal illness. Don't expect anything to happen in the short term, but I want to have a plan in place so I'm not trying to do this at the last minute when the time comes. I have Power of Attorney and currently handle all her affairs. I have 2 siblings and everything is to be divided equally between the three of us. I have accounts at Vanguard, so I know where my portion will end up.

EJ Accounts (unfortunately)
Taxable Account = $200K
IRA = $30K
Roth = $3K

American Equity Bonus Gold Annuity (Don't get me started :twisted: )
Fixed index annuity (S&P 500 Index)
Current Death Benefit Payout = $240K
Initial Investment = $170K
Never "annuitized?" or began payments. Just been sitting there.
Death benefit payout options:
1. Lump Sum
2. Annuitization

Questions
1. Should I receive a step-up in cost basis on all of the EJ accounts?
2. Will there be a step-up in cost basis for the AEBG annuity pay out? Probably a dumb question.
3. I'll definitely take my portion in payout for the annuity, but can siblings elect to annuitize their portion if they so desire?
4. What advice can you give to best handle this in the most tax-efficient manner?

Thank you in advance for your input!!

senex
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Re: Planning for eventual inherited accounts

Post by senex » Mon Jun 29, 2020 11:19 am

1. Yes, EJ will get step-up basis. Make sure she doesn't add a joint owner to the account, which may screw that up.

2. Not a dumb question. Annuities don't get step-up basis. I believe that's true even of the "death benefit" (but please double-check).

3. Not sure. From other threads, I get a sense that most companies want to keep you (have you annuitize).

4. If your mother is in a low tax bracket compared to all you kids, look into cancelling the annuity now. The tax paid by her may be less than the tax paid by kids after inheriting (annuity gains are taxed as ordinary income). If the amount she would receive is far less than death benefit, maybe it doesn't make sense -- you need to model the actual numbers.

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CAsage
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Re: Planning for eventual inherited accounts

Post by CAsage » Mon Jun 29, 2020 11:23 am

OnTopOfaStack wrote:
Mon Jun 29, 2020 10:36 am
EJ Accounts (unfortunately)
Taxable Account = $200K
IRA = $30K
Roth = $3K
The EJ taxable account will get a step up (or more accurately, the cost basis will be set as of the date of owner's death). You will not get a step up on either IRA, and note that after they split the account 3 ways (we presume..) it must be taken out and taxes paid at the beneficiary's bracket as ordinary income within 10 years. If Mom is needing any funds now, or she is in a lower tax bracket than the heirs, draw the IRA money out sooner. Withdrawing doesn't mean you have to spend it!
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Kenkat
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Re: Planning for eventual inherited accounts

Post by Kenkat » Mon Jun 29, 2020 11:27 am

The taxable account at EJ will get a step up basis. You will have to take distributions from the traditional IRA and pay tax on those distributions. The Roth will be tax free.

The annuity should have a cost basis equal to the original contributions. You won’t get a step up, but at least you won’t owe taxes on the full value of the annuity, just the increase in value since she has held it.

ionball
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Re: Planning for eventual inherited accounts

Post by ionball » Mon Jun 29, 2020 11:54 am

A close friend of mine inherited a variable annuity which was divided among two siblings. Each sibling filled paperwork independently, so in that case they could choose separate and different payout elections. Try to take RMDs before death in the final year. That way you won't need to coordinate all of the heirs taking the proportional RMDs. Not a major problem, but helps to simplify all the transfers.

The other posts above are great advice.

delamer
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Re: Planning for eventual inherited accounts

Post by delamer » Mon Jun 29, 2020 11:59 am

Is the account(s) at EJ held in a trust of any type?

If so, it is possible that you won’t get a step up.

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Stinky
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Re: Planning for eventual inherited accounts

Post by Stinky » Mon Jun 29, 2020 12:06 pm

American Equity Bonus Gold Annuity (Don't get me started :twisted: )
Fixed index annuity (S&P 500 Index)
Current Death Benefit Payout = $240K
Initial Investment = $170K
Is the current death benefit equal to the current surrender benefit? Probably, but you should find out.

If they are the same, it might very well make sense to surrender now, to the extent that Mom’s tax bracket is lower than those of her children. You’ll need to do some modeling to figure this out.
It's a GREAT day to be alive - Travis Tritt

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Re: Planning for eventual inherited accounts

Post by Jack FFR1846 » Mon Jun 29, 2020 12:09 pm

Consider having the mother take the annuity now as a lump sum. Then buy equities with the cash. When she passes, the basis gets stepped up and no taxes owed if sold right away.

If there's any chance of medicaid, don't do this.
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Alan S.
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Re: Planning for eventual inherited accounts

Post by Alan S. » Mon Jun 29, 2020 12:34 pm

For the annuity, what is the current cash value? Was there any other premiums paid beyond the initial investment?

If the death benefit is considerably more than the current cash value, do not surrender the annuity as that will eliminate the death benefit.

While the inherited Roth will be tax free, since your inherited Roth value is only 1000, for the purposes of simplicity I would cash it out. But if you still want to keep it you could hold it until the end of the 10 year period before closing it with no tax due. There are no annual RMDs under the 10 year rule. For the 10k inherited TIRA, you might want to draw it down in low tax years to avoid having a taxable lump sum distribution in year 10.

The EJ taxable accounts probably hold a gain, but I would check to see what the basis actually is to be sure. If there happened to be an unrealized loss, losses are only useable by the owner so she would have to redeem shares to realize any loss and reduce 2020 taxes.

If any of these accounts were already inherited by her (perhaps from spouse or sibling) please advise.

123
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Re: Planning for eventual inherited accounts

Post by 123 » Mon Jun 29, 2020 12:40 pm

OnTopOfaStack wrote:
Mon Jun 29, 2020 10:36 am
...I have 2 siblings and everything is to be divided equally between the three of us...
It's a good idea to confirm that the accounts have current beneficiary designations that are consistent with you mother's wishes. Beneficiary designations keep the assets out of the probate system (delays). Even though you have POA it is likely necessary for your mother to sign any updated beneficiary designations.

With various computer software updates and migrations it is not uncommon for beneficiary designations that were established many years ago to have gotten "lost" along the way. If they got lost the custodian would likely not distribute assets unless there was a probate order. Some account custodians send an annual confirmation that that includes advisements about what beneficiary designations are established. Sometimes older people plan beneficiary designations but fail to follow-through with the actual paperwork. It's better to be safe than sorry.
The closest helping hand is at the end of your own arm.

senex
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Re: Planning for eventual inherited accounts

Post by senex » Mon Jun 29, 2020 1:16 pm

123 wrote:
Mon Jun 29, 2020 12:40 pm
It's a good idea to confirm that the accounts have current beneficiary designations that are consistent with you mother's wishes. Beneficiary designations keep the assets out of the probate system (delays).
This is a good point. There was a recent thread about a typo on a beneficiary name, which caused a lot of headaches. Carefully check that every account is setup correctly, and if beneficiary names are listed, that the names are spelled correctly etc.

Alan S.
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Re: Planning for eventual inherited accounts

Post by Alan S. » Mon Jun 29, 2020 1:55 pm

+ 1.

This is a good idea for everyone, but checking should be redone even more often by those up in age. Despite continued bad outcomes, many people are still allowing their tax deferred accounts to go to their estate, some intentionally but most by oversight.

For some of those way up in years, even though they once named beneficiaries on these accounts, that beneficiary has sometimes passed, or is not the same beneficiary that would be named now.

Same could be said regarding many wills that were drafted decades ago.

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OnTopOfaStack
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Re: Planning for eventual inherited accounts

Post by OnTopOfaStack » Mon Jun 29, 2020 2:03 pm

senex wrote:
Mon Jun 29, 2020 11:19 am
4. If your mother is in a low tax bracket compared to all you kids, look into cancelling the annuity now. The tax paid by her may be less than the tax paid by kids after inheriting (annuity gains are taxed as ordinary income). If the amount she would receive is far less than death benefit, maybe it doesn't make sense -- you need to model the actual numbers.
Amount she would receive by cancelling is considerably less than the death benefit.
CAsage wrote:
Mon Jun 29, 2020 11:23 am
If Mom is needing any funds now, or she is in a lower tax bracket than the heirs, draw the IRA money out sooner.
Good idea. I will strongly consider this option.
delamer wrote:
Mon Jun 29, 2020 11:59 am
Is the account(s) at EJ held in a trust of any type?
No, it is not.
Stinky wrote:
Mon Jun 29, 2020 12:06 pm
Is the current death benefit equal to the current surrender benefit? Probably, but you should find out.
Surrender value is considerably less than the death benefit. And to make things worse, this thing has astronomical surrender charges that stretch 17 years. She is still in the 10% surrender charge phase.
Alan S. wrote:
Mon Jun 29, 2020 12:34 pm
The EJ taxable accounts probably hold a gain, but I would check to see what the basis actually is to be sure. If there happened to be an unrealized loss, losses are only useable by the owner so she would have to redeem shares to realize any loss and reduce 2020 taxes.
She hasn't been required to file a tax return in years. SS and a very small pension is her only income.
123 wrote:
Mon Jun 29, 2020 12:40 pm
It's a good idea to confirm that the accounts have current beneficiary designations that are consistent with you mother's wishes.
Beneficiaries are correct. I have one sibling who recently re-married so her name has changed. I should probably have the beneficiary name updated.

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Peter Foley
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Re: Planning for eventual inherited accounts

Post by Peter Foley » Mon Jun 29, 2020 2:13 pm

While not stated specifically, in addition to beneficiaries, you should check to see how each account is titled. Are any of them joint?

IMHO getting the accounts properly titled and the beneficiaries names on account is the critical first step.

Poor titling and beneficiary designations could result in one heir receiving tax free money (Roth or taxable) and another heir receiving the same sum with a tax obligation (IRA). Having everything in a joint account with the heir who is helping to manage finances might result in that heir having to gift substantial assets to the other heirs. This too could have long term tax consequences for higher net worth individuals. And, if the heirs do not get along, or do not agree, be mindful that joint accounts and beneficiary designations take place before and are independent of the division of assets noted in the will.

Just in case I have stated any of this incorrectly or inexactly, I would hope that Alan S. would take and quick look and confirm this.

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Stinky
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Re: Planning for eventual inherited accounts

Post by Stinky » Mon Jun 29, 2020 2:16 pm

OnTopOfaStack wrote:
Mon Jun 29, 2020 2:03 pm
Stinky wrote:
Mon Jun 29, 2020 12:06 pm
Is the current death benefit equal to the current surrender benefit? Probably, but you should find out.
Surrender value is considerably less than the death benefit. And to make things worse, this thing has astronomical surrender charges that stretch 17 years. She is still in the 10% surrender charge phase.
It sounds like your mom really got hosed on the annuity. A 17-year surrender charge - wow!! The surrender charge should be waived on death (or at least most annuities do that).

You could run the numbers, but I agree that it probably doesn’t make sense to surrender the annuity.
It's a GREAT day to be alive - Travis Tritt

RetiredAL
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Re: Planning for eventual inherited accounts

Post by RetiredAL » Mon Jun 29, 2020 2:25 pm

OnTopOfaStack wrote:
Mon Jun 29, 2020 10:36 am
Greeting Bogleheads,
I have received great responses and advice previously, so I am looking for advice to put a plan in place for accounts I will eventually have to deal with.

My mother is in her early 90's and has a terminal illness. Don't expect anything to happen in the short term......
Do understand what "care costs" can be a medical deduction, and how that applies to both her current and future taxes.

For example, Home Care and/or Assisted Living costs are deductible if she is 2 or more ADL deficient. A large medical deduction could easily swing you towards using the IRA moneys or Annuity cash-out now, and save the taxable account for a on-death basis step-up.

Careful of joint ownerships, as you lose the step-up basis. Joint on Checking and/or savings is OK, as long as the account balances are relatively low. Technically the surviving joint owner owns everything in that account, but it seems to be common to have this relationship and use that account account to pay estate costs and then divvy up the remainder per the will, being careful of gift rules. (Note: I am not a lawyer.)

Also, POA rights stops at her death, and the executor has to submit paperwork to take control of any of the Decedent's accounts/assets per the rules of the state she lives in.

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OnTopOfaStack
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Re: Planning for eventual inherited accounts

Post by OnTopOfaStack » Mon Jun 29, 2020 2:57 pm

RetiredAL wrote:
Mon Jun 29, 2020 2:25 pm
For example, Home Care and/or Assisted Living costs are deductible if she is 2 or more ADL deficient. A large medical deduction could easily swing you towards using the IRA moneys or Annuity cash-out now, and save the taxable account for a on-death basis step-up.
She's been in assisted living since February and she has a long term care policy. Of course, I'm still waiting on them to begin paying :oops: Does anyone know if LTC policy payments will count as income?
RetiredAL wrote:
Mon Jun 29, 2020 2:25 pm
Careful of joint ownerships, as you lose the step-up basis. Joint on Checking and/or savings is OK, as long as the account balances are relatively low. Technically the surviving joint owner owns everything in that account, but it seems to be common to have this relationship and use that account account to pay estate costs and then divvy up the remainder per the will, being careful of gift rules. (Note: I am not a lawyer.)
WOW! I didn't think of that. I am joint owner of her checking and savings accounts. Will I need to be concerned with exceeding the gift limit once it becomes mine and I divide it between my siblings??? :confused
Stinky wrote:
Mon Jun 29, 2020 2:16 pm
It sounds like your mom really got hosed on the annuity.
You have no idea. And it was sold to her by someone she had trusted for a long time and considered him a friend. He sold it to her within a couple months of her 80th birthday. Had he waited until she turned 80, there would only have been a 10-year surrender charge period instead of 17-years. Talk about a low life piece of scum. :twisted:

not4me
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Re: Planning for eventual inherited accounts

Post by not4me » Mon Jun 29, 2020 3:53 pm

Annuities come in a wide range & so this may not apply. However, there are 2 aspects to consider. One, SOME will allow annual "small" (maybe up to 10%?) withdrawals without incurring a surrender fee. Second, some will allow a partial withdrawal to fund LTC insurance. I believe in that case it must be between the annuity provider & LTC provider. However, should both of these pan out there may be an opportunity to withdraw some without paying income tax or surrender fees & also avoid spending other $s on LTC premiums. Even if the 2nd is not available but the 1st is, it might be advantageous.

Some companies such as Fidelity (& maybe Schwab?) will review existing annuities. In this case, that may only be of interest if you have trouble determining if this product supports the above.

Good luck -- sounds like you are doing a good job in a difficult situation

RetiredAL
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Re: Planning for eventual inherited accounts

Post by RetiredAL » Mon Jun 29, 2020 4:09 pm

OnTopOfaStack wrote:
Mon Jun 29, 2020 2:57 pm

She's been in assisted living since February and she has a long term care policy. Of course, I'm still waiting on them to begin paying :oops: Does anyone know if LTC policy payments will count as income?
Per my Dad's LTC provider Genworth:

For Tax Qualified Contracts: Your long-term care insurance contract provides only for reimbursement of qualified long-term care expenses. All benefits paid to reimburse you for such expenses are non-taxable, whether paid to you or to a care provider on your behalf. We are required to report to the Internal Revenue Service the amount of tax-free long-term care insurance benefits that you have received under your insurance contract, on a yearly basis.

You should retain the enclosed IRS Form 1099-LTC for your tax records, but, since your benefits are not taxable, you are not required to file any IRS Forms or take any other action as the result of receiving the enclosed Form 1099-LTC.

Note: Your policy will specifically state that it is intended to be a tax-qualified contract under theInternal Revenue Code. If the “Qualified contract” indicator in Box 4 is not checked and you are unable to determine whether your policy is Tax Qualified or not, please contact us xxx-xxx-xxxx
https://www.genworth.com/dam/Americas/U ... 202012.pdf


When I gave the 1099-LTC to my Dad's Tax Person, he noted the payment vs the ALF expenses on his worksheet, but I don't know if it actually shows someplace to the 1040 forms or their schedules. I don't have his tax stuff here at my house to look it up. There was no surprise tax bill. Bold in Genworth document is by me.

All LTC policies have a delay period. My Dad's was 90 days. Genworth has promptly paid and generally been easy to deal with. Do note ALF's bill for the month ahead and the LTC pays after the month. Thus I got billed by the ALF for June about 6/5 and LTC will pay about 7/10. Charges and Reimbursements are both auto ACH to my Dad's Checking.

My only grumble with Genworth has their repeated case review to verify he's still eligible. He's 95, in a wheelchair, has a catheter that he can't manage, can't shower himself, can't dress himself, yet they want to review his status each quarter. The last one was at the start of the Covid, they wanted me to do a video conference with him. I'm 90 miles away under covid restrictions, and he's under covid lockdown 100% no non-medical visitors. After a week of back and forth, they settled for an up-dated care plan from the ALF.

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OnTopOfaStack
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Re: Planning for eventual inherited accounts

Post by OnTopOfaStack » Mon Jun 29, 2020 4:18 pm

RetiredAL wrote:
Mon Jun 29, 2020 4:09 pm
All LTC policies have a delay period. My Dad's was 90 days.
Hers has a 21-day exclusion period, so they (Mutual of Omaha) should have started paying by now. They've been "reviewing" the case for nearly 4 months. Monthly premiums were supposed to cease after she'd been there for 90-days, but they're still drafting it.
not4me wrote:
Mon Jun 29, 2020 3:53 pm
One, SOME will allow annual "small" (maybe up to 10%?) withdrawals without incurring a surrender fee.
This annuity DOES allow for withdrawal of up to 10% per year without penalty. I thought about doing that, but at this point, I'm not sure how much of an advantage that would be. She doesn't need the money but maybe it's something I should do anyway. I'd appreciate suggestions on this point.

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Stinky
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Re: Planning for eventual inherited accounts

Post by Stinky » Mon Jun 29, 2020 4:24 pm

OnTopOfaStack wrote:
Mon Jun 29, 2020 4:18 pm
not4me wrote:
Mon Jun 29, 2020 3:53 pm
One, SOME will allow annual "small" (maybe up to 10%?) withdrawals without incurring a surrender fee.
This annuity DOES allow for withdrawal of up to 10% per year without penalty. I thought about doing that, but at this point, I'm not sure how much of an advantage that would be. She doesn't need the money but maybe it's something I should do anyway. I'd appreciate suggestions on this point.
If I understand it correctly, annuities in the accumulation phase are generally taxed on a LIFO basis. That is, earnings are taxed first until fully withdrawn, then principal is withdrawn.

If I'm correct, and if your mother's marginal tax bracket is lower than that of yours and siblings, it would make sense to take her 10% partial withdrawal this year, and every year in the future. She doesn't need the cash, but you'll save a little on taxes.
It's a GREAT day to be alive - Travis Tritt

not4me
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Re: Planning for eventual inherited accounts

Post by not4me » Mon Jun 29, 2020 4:32 pm

OnTopOfaStack wrote:
Mon Jun 29, 2020 4:18 pm
not4me wrote:
Mon Jun 29, 2020 3:53 pm
One, SOME will allow annual "small" (maybe up to 10%?) withdrawals without incurring a surrender fee.
This annuity DOES allow for withdrawal of up to 10% per year without penalty. I thought about doing that, but at this point, I'm not sure how much of an advantage that would be. She doesn't need the money but maybe it's something I should do anyway. I'd appreciate suggestions on this point.
I'm sure it's a hard call on withdrawing. It sounds as if the premiums won't be around long, so likely not worth pursuing. At times, for reasons that aren't financial, it is best to just not do anything unnecessary or clearly beneficial.

As for the pros of withdrawing....it would go against her taxes, which may well mean that it would be tax free. You should check out the impact on the death benefit if you did; not sure if it is $ for $. But when inherited, the withdrawal you/siblings take will be taxed at your rate (earnings that is). If it is invested 'now', that would get a stepup in basis.

Of course, no one knows how long this might be & I hope it is a while

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Re: Planning for eventual inherited accounts

Post by RetiredAL » Mon Jun 29, 2020 5:29 pm

OnTopOfaStack wrote:
Mon Jun 29, 2020 4:18 pm
RetiredAL wrote:
Mon Jun 29, 2020 4:09 pm
All LTC policies have a delay period. My Dad's was 90 days.
Hers has a 21-day exclusion period, so they (Mutual of Omaha) should have started paying by now. They've been "reviewing" the case for nearly 4 months. Monthly premiums were supposed to cease after she'd been there for 90-days, but they're still drafting it.
The first of my Dad's payments was under home care, which had no exclusion period. My recollection was we received payment about 6 weeks after submission. About the time we received the first LTC payment, he was hospitalized a second time and after that he went to Rehab and then straight to ALF. They accepted the first submission as the start of the 90 day exclusion, thus we only had a couple of weeks under that exclusion. But changing him to ALF residency required a new evaluation to be done, with its own review delay. In your case, I would expect Covid has messed up a lot of your carrier's internal processes aggravating your delay. In our case, this was all happening early 2019, long before covid.

I had paid his yearly premium in Jan 2019, thus the premium waver did not take effect until this year.

Bobby206
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Re: Planning for eventual inherited accounts

Post by Bobby206 » Mon Jun 29, 2020 6:33 pm

POA ends at death so make sure beneficiaries are set up properly.

Sandwich
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Re: Planning for eventual inherited accounts

Post by Sandwich » Mon Jun 29, 2020 9:04 pm

OnTopOfaStack wrote:
Mon Jun 29, 2020 2:03 pm
...
She hasn't been required to file a tax return in years. SS and a very small pension is her only income...
Consider converting some (all) of your Mom's IRA into the ROTH IRA ... perhaps up to the top of the 0% bracket to reduce eventual taxes to you and your siblings ... maybe into the 10% or 12% bracket if you and your siblings are in the 22% or higher bracket(s).

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Peter Foley
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Re: Planning for eventual inherited accounts

Post by Peter Foley » Mon Jun 29, 2020 10:46 pm

Sandwich wrote:
Consider converting some (all) of your Mom's IRA into the ROTH IRA ... perhaps up to the top of the 0% bracket to reduce eventual taxes to you and your siblings ... maybe into the 10% or 12% bracket if you and your siblings are in the 22% or higher bracket(s).
Good suggestion. If your mother is in assisted living for a number of months, even with the long term care insurance rebate she will likely have itemized deductions that will wipe out most if not all of her income. You should be able to figure this out after just a few months and then decide how much of her IRA to convert.

My MIL has been in assisted lived for 3 years. Even with long term care insurance, she has paid no taxes in those years due to health care expenses. Her income included SS benefits, an IRA annuity, and a pension. Still, zero tax bracket.

Kookaburra
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Re: Planning for eventual inherited accounts

Post by Kookaburra » Tue Jun 30, 2020 1:20 am

senex wrote:
Mon Jun 29, 2020 11:19 am
1. Yes, EJ will get step-up basis. Make sure she doesn't add a joint owner to the account, which may screw that up.
Could you elaborate on how a joint account could screw up the step-up in basis? My understanding is if one member of a joint account dies, then the surviving member gets a step-up in basis based on the value of the account at death. Is this not correct?

not4me
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Re: Planning for eventual inherited accounts

Post by not4me » Tue Jun 30, 2020 6:11 am

Another thought -- depending upon the state she is in & rest of estate not mentioned in your post...You might look into having the taxable account have "Transfer on Death". Not always allowed or beneficial, but worth considering

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OnTopOfaStack
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Re: Planning for eventual inherited accounts

Post by OnTopOfaStack » Tue Jun 30, 2020 7:42 am

not4me wrote:
Tue Jun 30, 2020 6:11 am
Another thought -- depending upon the state she is in & rest of estate not mentioned in your post...You might look into having the taxable account have "Transfer on Death".
EJ taxable account is already set up as TOD.


I want to thank everyone for their input and willingness to help in this situation. There were certainly a few items that I would have never thought of. This is truly a wonderful site and the people who contribute here are greatly appreciated. I have gained much insight on various issues posed by other members here who were seeking advice on a variety of topics. I hope that my situation and the advice received can help someone else in the future if they find themselves in a similar situation as mine.

Chris K Jones
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Re: Planning for eventual inherited accounts

Post by Chris K Jones » Tue Jun 30, 2020 8:41 am

I am sorry your Mom is sick. My Mom recently died. She was in a nursing home for a few years beforre she died. One thing I wish I had done was liquidate her IRAs before she died. She paid no federal or state income taxes for the years she was in the nursing home because the nursing home expenses are considered medical expenses. Thus she would have paid no taxes on the liquidation. This would have left more money in cash for her heirs and would have spared the Executor the trouble of dealing with the IRA custodian (AIG) who was difficult to deal with. Best wishes to you.

senex
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Re: Planning for eventual inherited accounts

Post by senex » Tue Jun 30, 2020 9:29 am

Kookaburra wrote:
Tue Jun 30, 2020 1:20 am
Could you elaborate on how a joint account could screw up the step-up in basis? My understanding is if one member of a joint account dies, then the surviving member gets a step-up in basis based on the value of the account at death. Is this not correct?
If the joint owners are husband and wife in a community property state, the full account value gets set-up basis.

In any other case, only the fraction of the account attributable to the deceased gets a step-up. In my experience, the major brokerages assume that half the account belongs to each joint owner, and thus their normal practice is to step-up "half." (Whether half the shares get a full step-up, or all the shares get a half step-up, I've seen it both ways; it may be a gray area of the law).

If you could prove that more than half the account value was attributable to the deceased (say, deceased added son as joint owner, and son had never deposited money into the account), then maybe you could get the full step-up. I haven't tried it, I don't know what proof is required, or how well the brokerages are equipped to deal with it. Also, I'm hazy on whether adding a joint owner constitutes a completed gift (for gift tax reporting purposes). That's why I said it "may" screw things up: there are a lot of unknowns (to a non-specialist) in this area.

Alan S.
Posts: 9693
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Planning for eventual inherited accounts

Post by Alan S. » Tue Jun 30, 2020 6:44 pm

The following is copied from Pub 551, p 10. While complicated by depreciation, this clarifies that the contributing JT's share of the account receives the basis adjustment, so if the decedent contributed 100%, the full account value receives a basis adjustment at death. This typifies so called "convenience accounts" where a parent contributed 100%, but added a child as JT to assist in handling the investment without POA hassles. The child then inherits the account and receives a full basis adjustment. There could be local law exceptions to this.
Property Held by Surviving Tenant

The following example explains the rule for the
basis of property held by a surviving tenant in
joint tenancy or tenancy by the entirety.
Example. John and Jim owned, as joint
tenants with right of survivorship, business
property they purchased for $30,000. John furnished two-thirds of the purchase price and Jim
furnished one-third. Depreciation deductions allowed before John's death were $12,000. Under local law, each had a half interest in the income from the property. At the date of John's
death, the property had an FMV of $60,000,
two-thirds of which is includible in John's estate.
Jim figures his basis in the property at the date
of John's death as follows:
Interest Jim bought with his
own funds—1/3 of $30,000
cost ................. $10,000

Interest Jim received on John's
death—2/3 of
$60,000 FMV ..........
40,000 $50,000

Minus: 1/2 of $12,000 depreciation
before John's death .............
6,000

Jim's basis at the date of John's
death ................
$44,000

If Jim hadn't contributed any part of the purchase price, his basis at the date of John's
death would be $54,000. This is figured by subtracting from the $60,000 FMV, the $6,000 depreciation allocated to Jim's half interest before
the date of death.
If under local law Jim had no interest in the
income from the property and he contributed no
part of the purchase price, his basis at John's
death would be $60,000, the FMV of the property.

RetiredAL
Posts: 732
Joined: Tue Jun 06, 2017 12:09 am
Location: SF Bay Area

Re: Planning for eventual inherited accounts

Post by RetiredAL » Mon Jul 06, 2020 2:12 pm

OnTopOfaStack wrote:
Mon Jun 29, 2020 2:57 pm
RetiredAL wrote:
Mon Jun 29, 2020 2:25 pm
For example, Home Care and/or Assisted Living costs are deductible if she is 2 or more ADL deficient. A large medical deduction could easily swing you towards using the IRA moneys or Annuity cash-out now, and save the taxable account for a on-death basis step-up.
She's been in assisted living since February and she has a long term care policy. Of course, I'm still waiting on them to begin paying :oops: Does anyone know if LTC policy payments will count as income?
RetiredAL wrote:
Mon Jun 29, 2020 4:09 pm


When I gave the 1099-LTC to my Dad's Tax Person, he noted the payment vs the ALF expenses on his worksheet, but I don't know if it actually shows someplace to the 1040 forms or their schedules. I don't have his tax stuff here at my house to look it up. There was no surprise tax bill. Bold in Genworth document is by me.

A now that I have it in-hand, a followup on what's actually on my Dad return relating to LTC reimbursement taxability: I see no reference on any form to the LTC payment amount.

Schedule A Medical entry states for non-reimbursed amounts. Neither gross nor reimbursement is asked for. Thus I assume the Tax Dude's interest in the 1099-LTC was for their software's worksheet calculation as to what was not reimbursed.

RetiredAL
Posts: 732
Joined: Tue Jun 06, 2017 12:09 am
Location: SF Bay Area

Re: Planning for eventual inherited accounts

Post by RetiredAL » Mon Jul 06, 2020 4:07 pm

Alan S. wrote:
Tue Jun 30, 2020 6:44 pm
The following is copied from Pub 551, p 10. While complicated by depreciation, this clarifies that the contributing JT's share of the account receives the basis adjustment, so if the decedent contributed 100%, the full account value receives a basis adjustment at death. This typifies so called "convenience accounts" where a parent contributed 100%, but added a child as JT to assist in handling the investment without POA hassles. The child then inherits the account and receives a full basis adjustment. There could be local law exceptions to this.
Property Held by Surviving Tenant

The following example explains the rule for the
basis of property held by a surviving tenant in
joint tenancy or tenancy by the entirety.
Example. John and Jim owned, as joint
tenants with right of survivorship, business
property they purchased for $30,000. John furnished two-thirds of the purchase price and Jim
furnished one-third. Depreciation deductions allowed before John's death were $12,000. Under local law, each had a half interest in the income from the property. At the date of John's
death, the property had an FMV of $60,000,
two-thirds of which is includible in John's estate.
Jim figures his basis in the property at the date
of John's death as follows:
Interest Jim bought with his
own funds—1/3 of $30,000
cost ................. $10,000

Interest Jim received on John's
death—2/3 of
$60,000 FMV ..........
40,000 $50,000

Minus: 1/2 of $12,000 depreciation
before John's death .............
6,000

Jim's basis at the date of John's
death ................
$44,000

If Jim hadn't contributed any part of the purchase price, his basis at the date of John's
death would be $54,000. This is figured by subtracting from the $60,000 FMV, the $6,000 depreciation allocated to Jim's half interest before
the date of death.
If under local law Jim had no interest in the
income from the property and he contributed no
part of the purchase price, his basis at John's
death would be $60,000, the FMV of the property.
Alan S. Question:

One of two siblings is joint ( convenience ) on parent's checking/saving accounts. Properties and investment accounts are in a revocable trust. After death of the parent and payment of all expenses from the joint accounts by the joint sibling as executor, the remainder is equally split. Does this create a "gift" issue to the first sibling upon transfer of $ to the second sibling? State is CA.

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