Inheritance

Q&A: How the kiddie tax can derail your inheritance tax strategy

July 6, 2026 By Liz Weston Leave a Comment

Dear Liz: I’m about 50 and have two early elementary school children. I make really good money and with the combination of all taxes the last dollar I make is taxed at about 50%.

I stand to inherit about $5 million from my parents. The problem is that about $3 million of that is in retirement funds. If those funds go to me, over the next 10 years I will have to take them as income and will lose half to taxes. I’m considering asking my mother to leave $1 million to each grandchild so that they can take it as income at a much lower tax rate, possibly saving $300,000 per kid. The problem is I am not sure I want my kids to have access to a million dollars the second they turn 18.

Is there any way I can avoid either giving them a ton of money when my parents die or me paying a ton in income taxes? Both kids already have 529s that will be filled in three to five years, so that is already out.

Answer: Not only is giving a million bucks to a teenager a bad idea, but the tax savings you’re hoping for may not materialize thanks to the kiddie tax.

Basically, unearned income above $2,700 a year is taxed at the parents’ rate, not the child’s, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. Unearned income includes interest, dividends, capital gains and taxable distributions from retirement accounts.

The kiddie tax can apply to offspring up to the age of 23 depending on their circumstances.

Minors who inherit a retirement account from a parent are required to take small distributions based on their own life expectancies until they turn 21. After that, they typically have to drain the accounts within 10 years. The 10-year clock starts immediately, however, when minors inherit a retirement account from anyone who is not a parent.

Another issue is that your parents’ retirement accounts don’t get the valuable step-up in tax basis at death that their taxable accounts would get, says Jennifer Sawday, an estate planning attorney in Long Beach. The step-up insures that no capital gains taxes are owed on the appreciation that occurs during the original owners’ lifetime. If your parents want to maximize the inheritance they leave, it would make sense to preserve those taxable assets as much as possible and spend down the retirement accounts, Sawday says. Another option is converting some of their retirement money to Roth IRAs, especially if their tax bracket is lower than yours and they’re willing to pay the taxes on the conversions. You’d still have to empty the Roths within 10 years of their deaths, but the withdrawals would be tax free.

Properly drafted trusts are another option to consider if your parents want to skip you and get money directly to their grandkids, Sawday says. Trusts allow distributions at specified ages (such as 25, 30 or even later). But trusts have complex rules and can have high tax rates. Your parents need to consult an experienced estate planning attorney as well as a tax pro before taking any of these actions.

Q&A: Why tell the IRS if you sell gold coins?

May 11, 2026 By Liz Weston

Dear Liz: Regarding the inherited gold coins question, why would anybody tell the IRS they inherited coins and subject themselves to a 28% capital gains tax? That seems very illogical.

Answer: To clarify, the original reader was asking about selling gold coins which had risen dramatically in value since she inherited them. Coins are considered collectibles so the difference between the inherited value and the sale price would be subject to a 28% federal capital gains tax.

How would the IRS know if you’ve sold gold coins for a profit? A dealer who buys the coins might be required to file a form with the IRS that’s designed to thwart money laundering. Also, payments are typically made through bank transfers or checks, unless you’re planning to walk out with a bag of cash like a cartoon bank robber. Bank transactions could be examined if you’re ever audited.

Even if you calculate the odds of getting caught as low, the question remains: Do you only do the right and lawful thing when you have to?

Most people who aren’t sociopaths have a sense of integrity. Doing something they know to be wrong damages that integrity, even if no one else ever knows. You may be able to save a bit of money by cheating on your taxes, but you can’t put a price on a clear conscience.

Q&A: What should I do with inherited gold coins?

April 13, 2026 By Liz Weston

Dear Liz: When my mother passed away nine years ago, I inherited some gold coins. At the time, it was difficult to go through her life’s belongings and part with things. Now that gold prices are so high, I’m wondering if it makes sense to sell those coins? I’m not sure holding on to them makes a lot of sense, but would appreciate any advice you might have.

Answer: Gold coins can be a good hedge against inflation as well as a portable source of wealth. But you need to store them securely to guard against theft and they probably should be insured, which can raise the costs of ownership.

If you want to turn your coins into cash, make sure to get at least three quotes from different sources such as reputable coin shops and jewelers. Also discuss the sale in advance with your tax pro. The difference between the value of the coins when you inherited them and their sale price would be considered a capital gain. Gold coins are taxed as collectibles, which means they’re subject to a 28% federal capital gains tax rate.

Q&A: How to track down lost savings bonds

August 18, 2025 By Liz Weston

Dear Liz: My mother passed away two years ago. She left a small mountain of paperwork which my brother, sister and I have finally started to sort through. Among the surprises that we have found is a receipt from a bank for the purchase of $4,500 of U.S. government savings bonds. The date of purchase is one month after the birth of her grandson in March 1992. We suspect that the bond was intended as a gift for the grandson. Is there a way to track down these bonds? Would a receipt from a bank be sufficient to satisfy the Treasury that the bond purchases were valid?

Answer: Savings bonds purchased in 1992 would have already matured and are no longer paying interest. If your mom didn’t cash in these bonds, you may be able to find them through the U.S. Treasury Department’s Treasury Hunt tool. You can find it at https://www.treasurydirect.gov/savings-bonds/treasury-hunt/.

Q&A: The lowdown on inherited IRAs

May 26, 2025 By Liz Weston

Dear Liz: I inherited my mother’s Roth IRA when she died in 2015 and have been taking yearly required minimum distributions based on my age. My spouse is my primary beneficiary on this inherited Roth IRA. What happens if I pass away before she does? Can she just roll it over into her existing Roth IRA, as is generally permitted for spousal IRA inheritance? Or are there additional limits imposed because it becomes a “doubly inherited” Roth IRA?

Answer: The SECURE Act largely eliminated the so-called stretch IRA that allowed non-spouse beneficiaries to take distributions over their lifetimes. IRAs inherited on or after Jan. 1, 2020, must typically be drained within 10 years.

That likely would be the case for your wife. Special rules allow a spouse to treat an inherited IRA as their own, but only when they inherit from the original IRA owner, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

There are a few exceptions. Your wife may be able to spread the distributions over her lifetime if she is disabled or chronically ill, for example.

If that’s not the case, she’s back to draining the account within 10 years. Many inherited IRAs require annual distributions. Since this is a Roth IRA, however, the original owner would not have been required to start distributions. Therefore, the spouse of the inherited Roth IRA beneficiary does not have a requirement to distribute annually over the 10-year period but may wait until the end of the 10-year period to do the full distribution, Luscombe says.