Last Week’s Question of the Week: What percent of grown children are currently helping their parents with either personal care or financial assistance? ANSWER: 25% of grown children are helping their parents.
HOST: Today you bring up an interesting topic surrounding the inheriting of assets, what can you tell us that we need to know?
KLAAS FINANCIAL: First of all, you probably may have heard that a relative has passed away, or perhaps it is a distant relative who left money to you and you simply receive something from an attorney in the mail. First of all, make sure it is legitimate. Don’t give out any personal information until you know for sure.
So, let’s suppose your uncle has passed away and has left you some property, some IRA’s and some after tax accounts, and some life insurance. What should you do?
- First, meet with your financial advisor. Let them look at your financial situation first, to help guide you to the best answer for your own situation. Maybe paying off debt, remodeling, investing, retirement concerns?
- Look at the various accounts and understand their titling and what that means to you. If they owned real estate, it is likely that it will go to probate (through the court) which could take a while to prove that you are indeed the beneficiary. Once it clears probate you will likely sell the asset which will be given a stepped- up cost at the time of death, and you will pay long-term capital gains on any gains.
- If they had life insurance and it was left to you, proceed to fill out death claim paperwork once you receive the certified death certificates. Understand that once you receive the proceeds (the death benefit) these normally will arrive income-tax free. This will be counted towards the total estate value, but unless the whole estate is more than $11.2 million dollars, you will not likely owe any income or estate taxes on the life insurance.
HOST: What about bank accounts, or IRA’s if I inherit these?
KLAAS FINANCIAL: So, for any bank or savings accounts or any after-tax investment accounts you will also be able to inherit these without having to pay any taxes. These may have to go through probate unless there is a POD (Payable on Death) registration on the account.
Roth IRAs: A Roth IRA is funded by after-tax dollars and thus, future withdrawals are tax free for the previous owner and yourself; however, unless you are the spouse of the decedent, you WILL have to take RMD’s during your lifetime from the Roth, but you will not have to pay tax on those distributions.
Traditional IRAs: These are funded with pre-tax dollars, and regardless if this passes to a spousal or non-spousal beneficiary, someone will pay taxes. You as the inheritor, will pay taxes on the distribution of income. Yes, you will pay taxes.
- Spousal: With a spousal inheritance, the spouse isn’t required to open a beneficiary account and can simply roll the inherited funds into their OWN IRA. You have the option to defer distributions until you are required (70.5 years old) to take RMD’s. If you plan to take a distribution before you reach age 59 ½ then you should open an Inherited IRA.
- Non-Spousal: If the inherited IRA is not from a spouse, the IRA is placed in a beneficiary IRA account and the Internal Revenue Service requires this new beneficiary account to be retitled. This means both the name of the decedent and the name of the beneficiary must appear on the account. Such designation allows the beneficiary to stretch out the withdrawals from the inherited IRA across his lifetime according to an RMD schedule.
- RMD’s: The RMD amount to be drawn out each year is based on the age of the original account holder, and the amount is based on your own life expectancy and the account value. However, by only taking out the RMD amount each year, you can continue to grow the financial life of your Inherited IRA, and can pass it in turn to your own future heirs.
HOST: What about social security? Can I inherit my spouses Social Security?
KLAAS FINANCIAL: So, if your spouse passes away, you will be able to collect only the larger of the two social security benefits, but you will not collect both. You really need to take this into account when you do your retirement planning as your income will be altered when of the couple passes. Also, when a person who has paid into the Social Security system for the required number of employment quarters dies, the surviving spouse or children may be eligible for a one-time payment of $255 to assist with funeral expenses.
HOST: I still hear about Federal estate taxes, death taxes and inheritance taxes? Are these all the same thing? Are you saying that I won’t have to pay this?
KLAAS FINANCIAL: Yes, those terms are somewhat inter-changeable. In addition to the federal estate tax, many states have enacted similar taxes which are termed an “inheritance tax”. Since estate taxes are often the subject of political debate, opponents of the estate tax call it the “death tax”.
History: the collection of Estate tax here in the United States has been around for more than 200 years. Under the 1797 Stamp Act, any document that concerned a property transfer after death–a will, a probate inventory, and the like–was subject to a tax. This tax was created, in part, to help to fund the national defense in the war against France, since then the tax has shown up with an estate exemption of varying dollars.
Federal Exemption: The federal government offers an exemption that allows estates under a certain value to pass property to heirs tax-free, and that exemption is really very generous. It has increased consistently since 1997 (exemption was only $600k) and the estate tax was at 55%; whereas In April of 2018, The IRS announced that the 2018 federal estate and gift tax limit is now $11,180,000, per person, so now a couple can shelter away
$22, 360,000. The estate tax has also decreased down to 40%.
The gross value of your estate must exceed the exemption amount for the year of your death before estate taxes become due. Even then, only the value over the exemption is taxable. But, you will have to check to see if there are any state estate taxes that may be due.
Reality: In fact in 2017, it’s estimated that only about one in every 517 estates had to pay estate tax, and in 2018 the amount will likely decrease.
Catch C.J. Klaas and Maleeah Cuevas on Money in Motion every Thursday on Madison's 1310 WIBA from 8:05-8:35am.
