Is account transfer to my wife taxable? Please review this plan

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tadamsmar
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Is account transfer to my wife taxable? Please review this plan

Post by tadamsmar »

Here is my goal: I was thinking about arranging for our 4 kids (3 of which are my step-kids) to have a inheritance if I survived my wife. Currently I would inherit all her money and assets. The kids would get no immediate inheritance if she pre-deceased me.

Anyway, I have a taxable account at Vanguard and I was thinking of putting part of it in her name at Vanguard and making the 4 kids the primary beneficiary.

I quick web search indicates that I can do this without paying any cap gains or other taxes because she is my spouse. Is that true?

I want to use this account because the kids would get the stepped up basis. It seems like part of this taxable account is the best one to pass on to the kids because of the tax avoidance angle. Another advantage is that it is easy to update the beneficiaries on a Vanguard account, we could tweak it if I felt like giving them or or less of the money depending on our future circumstances. No need to update a will.

Please review and critique my plan. Thanks for any input.

She already has roths and iras and we jointly own our house. But the taxable account seems to be the best choice.
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midareff
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Re: Is account transfer to my wife taxable? Please review this plan

Post by midareff »

"Here is my goal: I was thinking about arranging for our 4 kids (3 of which are my step-kids) to have a inheritance if I survived my wife. Currently I would inherit all her money and assets. The kids would get no immediate inheritance if she pre-deceased me."

You could gift them.
fyre4ce
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Re: Is account transfer to my wife taxable? Please review this plan

Post by fyre4ce »

Not the answer you're looking for, but I'd suggest you get an estate planning attorney in your state to help. In a more complex situation like this, involving step-children, a revocable living trust will give you a lot of flexibility to set things up the way you want them. Also, you didn't mention how big your IRAs are, but with the new ten-year distribution rule it could make sense to bequeath (say) half the IRA balance to heirs when one spouse dies, then the rest when the surviving spouse dies, to start a fresh ten year clock.
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Re: Is account transfer to my wife taxable? Please review this plan

Post by Gill »

I’ll answer the question in your subject line. No, you can transfer all you wish to a spouse with no tax consequences.
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stan1
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Re: Is account transfer to my wife taxable? Please review this plan

Post by stan1 »

Interspousal transfers are a remarkable loophole for those who have a need to take advantage of them.

Your approach seems reasonable to me. I'm assuming you don't have millions of dollars in this account; if you do then some of the other advice to see an attorney might be pertinent.
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tadamsmar
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Re: Is account transfer to my wife taxable? Please review this plan

Post by tadamsmar »

midareff wrote: Fri Oct 16, 2020 10:23 am "Here is my goal: I was thinking about arranging for our 4 kids (3 of which are my step-kids) to have a inheritance if I survived my wife. Currently I would inherit all her money and assets. The kids would get no immediate inheritance if she pre-deceased me."

You could gift them.
Gift it to the kids? The taxable account is over half cap gains. if I withdraw money to gift it to the kids, then the federal tax will be at between 13% and 20% as opposed to 0% for an inheritance.
Last edited by tadamsmar on Fri Oct 16, 2020 11:11 am, edited 1 time in total.
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midareff
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Re: Is account transfer to my wife taxable? Please review this plan

Post by midareff »

tadamsmar wrote: Fri Oct 16, 2020 11:02 am
midareff wrote: Fri Oct 16, 2020 10:23 am "Here is my goal: I was thinking about arranging for our 4 kids (3 of which are my step-kids) to have a inheritance if I survived my wife. Currently I would inherit all her money and assets. The kids would get no immediate inheritance if she pre-deceased me."

You could gift them.
Gift it to the kids? The taxable account is over half cap gains. if I withdraw money to gift it to the kids, then the federal tax will be at between 8% and 15% as opposed to 0% for an inheritance.
How about a trust that distributes to them after the death of both?
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tadamsmar
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Re: Is account transfer to my wife taxable? Please review this plan

Post by tadamsmar »

midareff wrote: Fri Oct 16, 2020 11:05 am
tadamsmar wrote: Fri Oct 16, 2020 11:02 am
midareff wrote: Fri Oct 16, 2020 10:23 am "Here is my goal: I was thinking about arranging for our 4 kids (3 of which are my step-kids) to have a inheritance if I survived my wife. Currently I would inherit all her money and assets. The kids would get no immediate inheritance if she pre-deceased me."

You could gift them.
Gift it to the kids? The taxable account is over half cap gains. if I withdraw money to gift it to the kids, then the federal tax will be at between 8% and 15% as opposed to 0% for an inheritance.
How about a trust that distributes to them after the death of both?

BTW, the tax rate is between 13% and 20%, I forgot state taxes.

I guess you mean a trust where I could not revoke it or something?
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tadamsmar
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Re: Is account transfer to my wife taxable? Please review this plan

Post by tadamsmar »

fyre4ce wrote: Fri Oct 16, 2020 10:26 am Not the answer you're looking for, but I'd suggest you get an estate planning attorney in your state to help. In a more complex situation like this, involving step-children, a revocable living trust will give you a lot of flexibility to set things up the way you want them.
Actually tried indicate that I was open to suggestions for reaching the goal. Thanks for removing my blinders!
Also, you didn't mention how big your IRAs are, but with the new ten-year distribution rule it could make sense to bequeath (say) half the IRA balance to heirs when one spouse dies, then the rest when the surviving spouse dies, to start a fresh ten year clock.
There are taxes on the IRAs. But you have given me an idea: maybe IRA money for the low income kid and untaxed inheritance for the high income kid who lives in a high tax state.
fyre4ce
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Re: Is account transfer to my wife taxable? Please review this plan

Post by fyre4ce »

tadamsmar wrote: Fri Oct 16, 2020 11:18 am
fyre4ce wrote: Fri Oct 16, 2020 10:26 am Not the answer you're looking for, but I'd suggest you get an estate planning attorney in your state to help. In a more complex situation like this, involving step-children, a revocable living trust will give you a lot of flexibility to set things up the way you want them.
Actually tried indicate that I was open to suggestions for reaching the goal. Thanks for removing my blinders!
Also, you didn't mention how big your IRAs are, but with the new ten-year distribution rule it could make sense to bequeath (say) half the IRA balance to heirs when one spouse dies, then the rest when the surviving spouse dies, to start a fresh ten year clock.
There are taxes on the IRAs. But you have given me an idea: maybe IRA money for the low income kid and untaxed inheritance for the high income kid who lives in a high tax state.
Take a look at the Wiki page on the Stretch IRA for some more ideas. A good estate planning attorney should help you with this, although you might need to do some number crunching yourself on the expected tax rates of your heirs, and decide on a division of assets yourself.
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midareff
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Re: Is account transfer to my wife taxable? Please review this plan

Post by midareff »

tadamsmar wrote: Fri Oct 16, 2020 11:10 am
midareff wrote: Fri Oct 16, 2020 11:05 am
tadamsmar wrote: Fri Oct 16, 2020 11:02 am
midareff wrote: Fri Oct 16, 2020 10:23 am "Here is my goal: I was thinking about arranging for our 4 kids (3 of which are my step-kids) to have a inheritance if I survived my wife. Currently I would inherit all her money and assets. The kids would get no immediate inheritance if she pre-deceased me."

You could gift them.
Gift it to the kids? The taxable account is over half cap gains. if I withdraw money to gift it to the kids, then the federal tax will be at between 8% and 15% as opposed to 0% for an inheritance.
How about a trust that distributes to them after the death of both?

BTW, the tax rate is between 13% and 20%, I forgot state taxes.

I guess you mean a trust where I could not revoke it or something?
Trusts can be revocable or not, depends on what you tell the lawyer who sets it up. I have started looking at that myself for assets that don't lend themselves to joint ownership such as paid off car, residence and IRAs.
Lee_WSP
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Re: Is account transfer to my wife taxable? Please review this plan

Post by Lee_WSP »

Your plan is sound. Just make sure the tod allows for multiple beneficiaries.

There's a lot of other ways to solve this issue, but I'm assuming that if you die first you want your wife to take everything and be completely in charge of how she leaves the residual.

There's some scenarios I'd caution you about, but you need to talk with a very experienced attorney or read some of Jeffrey Condon's writings.
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Re: Is account transfer to my wife taxable? Please review this plan

Post by Katietsu »

tadamsmar wrote: Fri Oct 16, 2020 11:18 am
There are taxes on the IRAs. But you have given me an idea: maybe IRA money for the low income kid and untaxed inheritance for the high income kid who lives in a high tax state.
Just be careful about focusing too much on tax optimization. The problem here can be that you set this up so that it is perfect and equitable today but not when it matters. It sounds like you have no intention of this plan kicking in anytime soon. I have no idea how long of term planning this is. But let’s assume the inheritance does not happen for 15 years and you are not capable of being on top of these optimization details for the last five. You could end up with something very different than you intended if you are not very careful.
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Re: Is account transfer to my wife taxable? Please review this plan

Post by tadamsmar »

Katietsu wrote: Fri Oct 16, 2020 1:15 pm
tadamsmar wrote: Fri Oct 16, 2020 11:18 am
There are taxes on the IRAs. But you have given me an idea: maybe IRA money for the low income kid and untaxed inheritance for the high income kid who lives in a high tax state.
Just be careful about focusing too much on tax optimization. The problem here can be that you set this up so that it is perfect and equitable today but not when it matters. It sounds like you have no intention of this plan kicking in anytime soon. I have no idea how long of term planning this is. But let’s assume the inheritance does not happen for 15 years and you are not capable of being on top of these optimization details for the last five. You could end up with something very different than you intended if you are not very careful.
That's a good point. I was thinking I could just tweak as needed since Vanguard beneficiaries are easy to tweak. But I need a sound mind.
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Re: Is account transfer to my wife taxable? Please review this plan

Post by chemocean »

Actually, if your account is in your name only, I don't think Vanguard will allow you to transfer the funds to an account in her name only.
Because Vanguard does not allow beneficiaries on joint accounts, my wife and I split our small joint account taxable account into two single accounts to allow beneficiaries and contingent beneficiaries. I then tried to transfer the dividend in my FMM account to her FMM account. Vanguard said no. They will make transfers only between accounts with one name in common.
I first had to transfer the funds out of my FMM account at Vanguard into a joint savings account and from the joint account back to Vanguard to her FMM account.
I think in order for you to accomplish your goal, you will first need to add her to your account as a joint account and then you can transfer to her account in her name only with no tax consequences.
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Re: Is account transfer to my wife taxable? Please review this plan

Post by retiringwhen »

chemocean wrote: Fri Oct 16, 2020 3:11 pm Actually, if your account is in your name only, I don't think Vanguard will allow you to transfer the funds to an account in her name only.
Because Vanguard does not allow beneficiaries on joint accounts, my wife and I split our small joint account taxable account into two single accounts to allow beneficiaries and contingent beneficiaries. I then tried to transfer the dividend in my FMM account to her FMM account. Vanguard said no. They will make transfers only between accounts with one name in common.
I first had to transfer the funds out of my FMM account at Vanguard into a joint savings account and from the joint account back to Vanguard to her FMM account.
I think in order for you to accomplish your goal, you will first need to add her to your account as a joint account and then you can transfer to her account in her name only with no tax consequences.
Actually, with appropriate signature guarantees and agent authorization forms, you can move assets between accounts. In addition, there is a standard manual form at Vanguard that allows you to transfer assets between different ownership arrangements. Just we warned, it is not trivial, and has more steps than usual transfers. All those things are done to protect the owner of the assets, not because Vanguard is somehow incompetent or behind the times... You will see similar steps at any other institution.

I have done it more than once and it is doable.

BTW, I agree with the commenters that the situation really invites a true estate plan discussion. You may solve one problem and create 6 new ones. Blended families, like Shrek, have many layers.
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Re: Is account transfer to my wife taxable? Please review this plan

Post by Luckywon »

The flip side of transferring the account to your wife is that if you predecease her, she will not get the step-up that she would have if it remained titled to you and she inherited it (I'm assuming this is separate property and you do not live in a community property state).
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Re: Is account transfer to my wife taxable? Please review this plan

Post by TomatoTomahto »

fyre4ce wrote: Fri Oct 16, 2020 10:26 am Not the answer you're looking for, but I'd suggest you get an estate planning attorney in your state to help.
+1

OP, I’m sure that you and your spouse are honorable people. But, it’s a complicated road with blended families, especially when a widow/widower remarries.

I also think it’s a bad idea to get too cute in tax optimization. For example, one of my kids makes gazillions, another doesn’t. They are getting equal inheritances. Tax laws change. For all I know, by the time we die the big earner could be bankrupt. An exaggeration, but you get my point; more likely the low earner will have found his stride.
Okay, I get it; I won't be political or controversial. The Earth is flat.
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Re: Is account transfer to my wife taxable? Please review this plan

Post by whomever »

"we could tweak it if I felt like giving them or or less of the money depending on our future circumstances. No need to update a will."

This may be state dependent, or I misunderstood, but I was talking to an estate atty a few days ago who said you can have a will that says '...see specific bequests in Addendum A', where addendum A is a one page form saying 'Give $10 to Fred, $20 to Joe, and half of account 1234 to Alice', etc, etc. The notion is that you could just make a copy with new names/amounts, get it notarized, and replace the old one on a DIY basis.
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Re: Is account transfer to my wife taxable? Please review this plan

Post by Gill »

whomever wrote: Fri Oct 16, 2020 4:08 pm "we could tweak it if I felt like giving them or or less of the money depending on our future circumstances. No need to update a will."

This may be state dependent, or I misunderstood, but I was talking to an estate atty a few days ago who said you can have a will that says '...see specific bequests in Addendum A', where addendum A is a one page form saying 'Give $10 to Fred, $20 to Joe, and half of account 1234 to Alice', etc, etc. The notion is that you could just make a copy with new names/amounts, get it notarized, and replace the old one on a DIY basis.
This is called a separate writing and is valid in most states to dispose of tangible personal property such as cars, furniture and clothing. I'm not aware of it being permissable for cash bequests.
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Post by whomever »

"This is called a separate writing and is valid in most states to dispose of tangible personal property such as cars, furniture and clothing. I'm not aware of it being permissable for cash bequests."

FWIW: that was exactly my recollection from 20 odd years ago when we last had our wills done. We're in the process of revising ours, and are chatting with a couple of estate attorneys. I mentioned my recollection that only tangible property was allowed, but atty #1 said specifically that cash bequests were allowed now. I'll be sure to ask any others we talk to :-).

I have to say, I surely wish it was allowed. We have tried to do the same secondary-TOD-beneficiary workaround that the OP is considering; just being to able to specify directly would be really nice. If I may ask, why is the idea deprecated?

(state is WA, FWIW)
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Post by tadamsmar »

whomever wrote: Fri Oct 16, 2020 4:08 pm "we could tweak it if I felt like giving them or or less of the money depending on our future circumstances. No need to update a will."

This may be state dependent, or I misunderstood, but I was talking to an estate atty a few days ago who said you can have a will that says '...see specific bequests in Addendum A', where addendum A is a one page form saying 'Give $10 to Fred, $20 to Joe, and half of account 1234 to Alice', etc, etc. The notion is that you could just make a copy with new names/amounts, get it notarized, and replace the old one on a DIY basis.
The Vanguard funds would have the beneficiary as the kid, not the estate. I don't think there are any state-dependent rules on this. The will covers only the estate. Someone correct me if I am wrong.
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Re: Is account transfer to my wife taxable? Please review this plan

Post by Gill »

whomever wrote: Fri Oct 16, 2020 4:30 pmI mentioned my recollection that only tangible property was allowed, but atty #1 said specifically that cash bequests were allowed now. I'll be sure to ask any others we talk to :-).

I have to say, I surely wish it was allowed. We have tried to do the same secondary-TOD-beneficiary workaround that the OP is considering; just being to able to specify directly would be really nice. If I may ask, why is the idea deprecated?

(state is WA, FWIW)
I would be very surprised if cash bequests could be made in any state through a separate writing. The State of Washington limits its use to tangible personal property as do all others of which I’m familiar.
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Re: Is account transfer to my wife taxable? Please review this plan

Post by bayview »

tadamsmar wrote: Fri Oct 16, 2020 10:05 am Here is my goal: I was thinking about arranging for our 4 kids (3 of which are my step-kids) to have a inheritance if I survived my wife. Currently I would inherit all her money and assets...
Could you simply disclaim your inheritance from her, letting it go to the kids instead?
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri
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tadamsmar
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Re: Is account transfer to my wife taxable? Please review this plan

Post by tadamsmar »

bayview wrote: Tue Oct 20, 2020 7:00 pm
tadamsmar wrote: Fri Oct 16, 2020 10:05 am Here is my goal: I was thinking about arranging for our 4 kids (3 of which are my step-kids) to have a inheritance if I survived my wife. Currently I would inherit all her money and assets...
Could you simply disclaim your inheritance from her, letting it go to the kids instead?
That is something to be considered, I could do that with part of her TSP. See here: https://www.govinfo.gov/content/pkg/CFR ... 651-15.pdf

The rest of her accounts are Roth and they are not taxed anyway. I could just gift those.
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Re: Is account transfer to my wife taxable? Please review this plan

Post by bayview »

tadamsmar wrote: Tue Oct 20, 2020 8:25 pm
bayview wrote: Tue Oct 20, 2020 7:00 pm
tadamsmar wrote: Fri Oct 16, 2020 10:05 am Here is my goal: I was thinking about arranging for our 4 kids (3 of which are my step-kids) to have a inheritance if I survived my wife. Currently I would inherit all her money and assets...
Could you simply disclaim your inheritance from her, letting it go to the kids instead?
That is something to be considered, I could do that with part of her TSP. See here: https://www.govinfo.gov/content/pkg/CFR ... 651-15.pdf

The rest of her accounts are Roth and they are not taxed anyway. I could just gift those.
Of course, this won’t really help if you lose cognitive abilities (potentially very awkward depending upon who is your POA), but if this is a just-in-case situation, and you don’t anticipate outliving her, it could kick the can down the road a bit.

But with a blended family (as is ours), I think you’ll feel a lot more settled with a trust of some sort.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri
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