Inheritance

Q&A: Here’s how taxes work on estates and inherited money

July 5, 2021 By Liz Weston

Dear Liz: Are all assets entitled to a stepped-up basis upon the death of the owner? My father died about a year ago, leaving my sister and me an estate of a little over $1 million. He had a Thrift Savings Plan that is apparently like a 401(k) for federal government employees. This is getting taxed at 37%. Also he had U.S. Savings Bonds and the interest on those is apparently taxable. I was under the impression all assets in an estate under $11 million were not taxable. Is this not correct?

Answer: That’s not correct. You’re confusing a few different types of taxes.

Estate taxes are levied on certain large estates when the owner dies, and those taxes are typically paid out of the estate. The current estate tax exemption limit is $11.7 million, up from $11.58 million last year. After 2025, the limit is scheduled to drop to $3.5 million, but even then very few estates will owe the tax.

Another type of tax is the capital gains tax. This essentially taxes the profit someone makes when they sell a stock or other asset. Capital gains tax rates are typically 15%, but they can be as low as zero or as high as 20%, depending on the seller’s income.

Inherited assets that qualify for capital gains tax treatment also can qualify for the “step up in basis” that may reduce the tax bill, sometimes dramatically. If your dad paid $10 for a stock that was worth $100 when he died, you could sell it for $105 and owe taxes only on the $5 in appreciation since his death. The $90 appreciation that occurred during his lifetime would never be taxed.

Not all assets qualify for capital gains treatment, however. Retirement accounts, including 401(k)s and IRAs, are a good example.

People usually get tax breaks when they contribute and the accounts grow tax deferred. When the money comes out, however, the withdrawals are taxed as income regardless of whether it’s the original owner getting the money or the heir. Whoever makes the withdrawal pays the taxes.

Federal income rates currently range from zero to 37%. The 37% rate applies for singles with taxable income of $523,601 or more and married couples filing jointly with taxable incomes of $628,301 or more.

Q&A: Dad didn’t trust banks. How to handle the hoard he left behind

June 21, 2021 By Liz Weston

Dear Liz: My father was eccentric and given to conspiracy theories. He didn’t trust banks or the stock market and invested the bulk of his money in gold coins and bars. We are talking millions of dollars at current gold prices. My parents set up a living trust, so when my mother dies, I am confident the gold will be distributed equitably to myself and my siblings, without a lot of hassle in probate. But I have no idea how to convert all that gold into a more liquid investment like an IRA or money market fund. How do I do it and not be overwhelmed with fees and taxes?

Answer: Let’s hope the gold is safely stored and properly insured. It would be a shame if burglars walked away with your inheritance.

If your mother’s estate is large enough to owe estate taxes, the estate will pay those — not the heirs. (The current exemption is more than $11 million per person, so very few estates owe this tax.)

Under current law, the gold will receive a new, “stepped-up” value for tax purposes on the day your mother dies, said Jennifer Sawday, an estate planning attorney in Long Beach. You should note the price of gold on that day, using a reliable gold pricing site, and print out the information for future tax purposes, Sawday said.

Once you receive the gold, you can take it to a precious metals exchange and cash it in. If the price you get is higher than the price of gold on the day your mother died, you would have a taxable capital gain. If the price is lower, you would have a capital loss. You wouldn’t owe any taxes and could use the loss to offset capital gains elsewhere or, if you don’t have gains, as much as $3,000 of income per year until the loss is exhausted.

You can deposit the cash in a bank account, or open a brokerage account and choose your investments from there. Those investments might include a money market fund as well as stocks, bonds, mutual funds and so on.

An IRA is a type of retirement account, not an investment, and requires you to have earned income to contribute. The contribution limit is $6,000 this year, or $7,000 if you’re 50 or older, so you wouldn’t be able to put much of your inheritance into an IRA in any case.

An excellent use of some of this cash would be to hire a fee-only, fiduciary financial planner who can help guide you on how to invest the money wisely and with an eye to minimizing taxes.

Q&A: A sudden death brings a financial quandary

June 7, 2021 By Liz Weston

Dear Liz: My son suddenly passed away and his $1-million life insurance policy was awarded to me, his mother. I want the money to be divided equally between his two children for future use. They are 18 and 15 now. What financial vehicle should I use? The funds are in my money market account just waiting to be placed into something.

Answer: Please use some of the money to pay for individualized counsel from advisors who are fiduciaries. Fiduciary means the advisor is required to put your best interests first. Most advisors are not fiduciaries but you can find financial planners who are through the National Assn. of Personal Financial Advisors, the XY Planning Network, the Garrett Planning Network and the Alliance of Comprehensive Planners.

The vehicle or vehicles you use for the money will depend on your goals and how you want to distribute the funds over time. You’ll need good advice about how to invest, minimize taxes and incorporate the money into your own estate plan. Distributing money to your grandchildren can trigger the need to file gift tax returns, although you wouldn’t actually owe gift taxes until you’d given away millions of dollars.

Your son may have chosen you as his beneficiary because he trusted you to do right by his children. Or he may not have updated his beneficiaries since applying for the policy. (More than a few ex-spouses have wound up with life insurance proceeds because the policy owner didn’t update the beneficiaries after the divorce.) It’s a good idea to check the beneficiaries on any life insurance once a year or after any major life change to make sure the money is still going where you want.

Q&A: Tax consequences of giving versus bequeathing

December 14, 2020 By Liz Weston

Dear Liz: Someone who expects to be an executor recently wrote to you about a plan to distribute individual pieces of art to family members. Your response addressed the executor’s responsibility to determine the art’s worth before doing so. You also suggested having the parent designate what was to go to whom. What would the consequences be of the parent giving the pieces of art to the intended recipient prior to death? My mother did both; i.e., gave some to me and some to my sister prior to her death, and designated others to be distributed following her death. She had personal rather than financial reasons for doing it this way.

Answer: Let’s say your mom bought a painting from a struggling artist for $500. Later, the artist became famous and the painting’s value rose to $500,000. If she gave you the painting and you sold it, you would have to use the amount she paid — her basis — to determine the taxable profit ($499,500).

If she bequeathed the painting to you instead, the artwork would get a new tax basis which is usually its value on the day she died. You could sell the painting for $500,000 and not owe a dime in taxes.

Few people have artworks that experience that kind of appreciation — or any appreciation, for that matter. The issue of basis most often comes up when people are transferring real estate, stocks or other assets in transactions that are reported to the IRS. If your mom did have valuable works, though, transferring them through bequests could be advisable.

Q&A: Unloading collections while you’re still alive

November 2, 2020 By Liz Weston

Dear Liz: You recently advised someone who didn’t know whom to select to administer a living trust because the person has no spouse, children or other living relatives. This person mentioned they had collectibles. An additional thing they should consider doing is donating the collection while alive to an archive, museum or other appropriate organization that would be interested in receiving it or in selling the items to support their mission. That way they won’t end up in the trash but will be handled appropriately. There also might be a tax advantage to this donation.

Answer: That’s an excellent suggestion. Here’s another good one:

Dear Liz: Selling off collectibles is a long, time-consuming undertaking. My husband was a huge collector and we did not want to leave that burden to our son. So when he retired, he started selling things on EBay. It was a lot of work and took him years. (We checked with our son to make sure he didn’t want the things he sold.)

Answer: What an excellent retirement project as well as a huge gift to your son. The first step is being willing to part with a collection while alive. Those who are ready to do so may be in a better position to find eager buyers than anyone who inherits the collection.

Collectors who don’t have the time or energy for this process can consider hiring someone to do it. Other alternatives include selling to a dealer, either outright or through consignment, or hiring an auction house, if the collection is valuable enough to attract bidders’ interest.

Thursday’s need-to-know money news

July 23, 2020 By Liz Weston

Today’s top story: What to do with your ‘treasures’ your kids don’t want. Also in the news: How ‘shadow lenders’ can leave college students in the dark, why it’s harder than ever to find a balance transfer offer right now, and 5 destinations from Netflix hits to inspire your future travels.