Ask Liz Weston

Get smart with your money

Inheritance

Q&A: Inheriting an IRA can get messy

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Dear Liz: My brother passed away at age 47. My mother was named beneficiary of his retirement account. We opened an inherited IRA under her name. Sadly, my mother recently passed away, and my father is the beneficiary of the account. Does my father open a regular IRA or inherited IRA? How would the title on the account be listed with my mother and brother deceased? Are they both listed?

Answer: Inheriting an inherited IRA complicates an already complex set of rules.

The regulations are different depending on whether the person inheriting is a spouse. Spouses can treat the inherited account as their own. They can leave the money where it is, make new contributions or transfer the funds to another retirement account they own. They also have more flexibility in how to take required minimum distributions from the account.

Non-spouse beneficiaries, like your mother, don’t have the option of treating the IRA as their own. They must set up a new inherited IRA and start distributions. Until this year, non-spouse beneficiaries could take distributions over their lifetimes. Now non-spouse beneficiaries are required to drain their inherited IRAs within 10 years.

How the account is titled is important, because improper titling can cause it to lose tax deferral and accelerate the tax bill. Let’s say your brother’s name was Tom Johnson and he died in March 2019, leaving his IRA to your mother, Mabel Johnson. A correct title for the new inherited IRA would be “Tom Johnson (deceased March 2019) Inherited IRA for the benefit of Mabel Johnson.”

Your family’s situation creates a hybrid of the two situations. Your dad would have an inherited spousal IRA, but his mandatory withdrawals would be based on your mother’s required minimum distributions, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

Your dad should open a new inherited IRA, Luscombe says. Assuming his name is Bill Johnson, the title of the inherited IRA should be “Tom Johnson (deceased March 2019) Inherited IRA for the benefit of Bill Johnson, successor beneficiary of Mabel Johnson.”

Q&A: Avoid this hidden risk to your retirement

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Dear Liz: I have very low net worth and just inherited $500,000 from a cousin’s annuity. My net worth includes a $400,000 house with a $290,000 mortgage at 3.75%, IRA accounts of $65,000 and savings of $90,000. I also have a pension from which I receive $50,000 annually and from which our health insurance is paid. My husband is 72 and receives $6,000 annually from Social Security. I will turn 70 in a few months and will begin taking Social Security and tapping my IRAs. I have very little debt. What is the safest thing to do with this inheritance?

Answer: That depends on how you define “safe.”

Investments that don’t put your principal at risk typically offer returns that don’t beat inflation over time. That means your buying power is eroded. At 70, you may not think you need to worry much about inflation. But your life expectancy as a woman in the U.S. is 16.57 more years. About one-third of women your age will make it to age 90.

That doesn’t mean you have to take investment risk with this money by buying stocks, which are the one asset class that consistently outpaces inflation. But you’d be smart to have a fee-only financial planner take a look at your situation to make sure you’re investing appropriately, based on your goals.

And it’s your goal for this money that will help determine how to invest it. If you want the money to be readily available and safe from investment risk, then you could put it in an FDIC-insured, high-yield savings account paying 2% or so. Just make sure you don’t exceed FDIC limits, which typically cap insurance coverage at $250,000 per depositor, per bank. (You can stretch that coverage if you put the money in different “ownership categories,” such as individual, joint, retirement and trust accounts.) If you don’t expect to need the money for many years, investing at least some of it in bonds or stocks may be appropriate.

Also, a small reality check: Your net worth before the inheritance was $265,000, based on the figures you provided. That’s more than most people in your age bracket. Households headed by people ages 65 to 74 had a median net worth of about $224,000 in 2016, according to the Federal Reserve’s latest Survey of Consumer Finances. That’s not to say you’re rich, but you do have more than most of your peers — especially now.

Q&A: When family balks at paying their fair share

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Dear Liz: I inherited half a duplex from my parents. They were partners with my aunt and uncle. When alive, all parties shared expenses for the common areas. I rent out my half of the duplex while my aunt still lives in the other half. My cousins now control my aunt’s finances (she is 94 and in poor health). They refuse to reimburse me for common-area expenses such as painting the exterior (the paint was peeling, exposing the wood, and hadn’t been painted in more than 10 years) and repairing and updating the electrical panel, which had frayed and exposed wires that posed a fire hazard. The panel is on their half of the duplex but serves both units. These costs were about $15,000. What can I do? It’s not fair that I pay for everything when both owners benefit from the necessary repairs.

Answer: Your best hope may be to change your approach. Did you ask your cousins to help you pay for the repairs before you had them done, or only afterward? If they had no input into what was done or how, it’s understandable that they would balk when presented with half the bill.

Of course, they might have balked anyway, and that’s why owning property with other people can get tricky: They often don’t share your opinions about what needs to be done and how much to spend. Some prefer to defer maintenance and repairs indefinitely rather than shell out money to protect their investment. Others understand how important maintenance and repairs are but might want to do some of the work themselves to save money (although do-it-yourselfers shouldn’t attempt an electrical panel upgrade, obviously.)

So your frustration is understandable, but your options may be limited. If you can’t work something out with your cousins, your alternative may be to sell your half of the duplex, but that could require going to court to force a “partition” of the property. You should talk to an attorney familiar with the property laws in your state so you can get an idea of your options and their cost.

Q&A: Estate tax versus inheritance tax

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Dear Liz: In a recent column, you wrote that “only six states … have inheritance taxes.” My state of Oregon is not listed. Oregon certainly has an estate tax (one of the highest in the U.S.) and Washington also has one.

Answer: Many people confuse estate and inheritance taxes, but they’re not the same thing.

As the name implies, estate taxes are taxes levied on the dead person’s estate. The federal government, 12 states (Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont and Washington) and the District of Columbia have estate taxes.

Only the six states mentioned in the previous column — Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania — have an inheritance tax, which is levied on the person who inherits. New Jersey had an estate tax, but that was repealed in 2018, leaving Maryland as the only state with both types of tax.

Q&A: Selling an inherited house to a relative will affect tax treatment

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Dear Liz: My mother recently died, leaving a house to my three siblings and me. We had the house appraised in February. My sister is buying the rest of us out. We decided to give our sister a break and sold her the house below the appraised amount. As the “selling price” (which will be a public record) will be below the appraisal, can I take my “loss” on my taxes this year? I gave her a $25,000 reduction, so I assume I can take $3,000 a year for eight years. Is this true?

Answer: Probably not.

The sale to a family member probably dooms any chance of taking a capital loss, said Mark Luscombe, principal analyst for tax and accounting at Wolters Kluwer.

“The law is not entirely clear on this topic with the IRS perhaps taking a more severe stand than the Tax Court, but both seem to frown on any use of the real estate for personal purposes after the death of the parent,” Luscombe said.

For a capital loss, the IRS appears to require that the inherited property be sold in an arm’s length transaction to an unrelated person, Luscombe said. The IRS also requires that you and your siblings did not use the property for personal purposes and did not intend to convert the property to personal use before the sale.

Even the Tax Court cases appear to at least require a conversion to an income-producing purpose before the sale and no personal use of the property after the death of the parent.

“The reader may find a court willing to say that personal use by a sibling is not personal use by the reader, and, from the reader’s perspective, it was converted to investment property,” Luscombe said. “However, since this was a sale to a sibling and not an unrelated person, I think that the IRS would disagree with that position.”

Q&A: Tax take on inherited house

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Dear Liz: In a recent column, you quoted an attorney saying that if an inherited home in a trust is sold for its value at the date of death, the trust won’t owe capital gains. We sold our family’s house in 2007 within a month of my mother’s death and the government took half. Fortunately it was a really valuable house in Brentwood, but what are you talking about? I must be missing something.

Answer: If the government took half, then estate taxes — rather than capital gains taxes — probably triggered that hefty bill.

When your mother died, the estate tax exemption limit was much lower — $2 million, compared with the current $11.4 million. The top federal estate tax rate then was 45%, compared with 15% for capital gains.