Family Pulling Party Favors During Christmas Dinner

You may think your work is done when your estate plan is completed. However, a remaining step may be informing the kids about what they face.

If you wish to pass your estate on to your children, it might be a good idea to spend some time educating them about the challenges and responsibilities they face, according to Kiplinger in “5 Financial Challenges Your Kids Will Face With Your Estate“.

Many parents don’t have the answers themselves to these questions, so they have to come up to speed first before they can talk about these matters with their kids.

Five things to pass on to the children:

  • Taxes and IRAs. Chances are your children won’t know that they will be paying taxes on IRA withdrawals. They will be likely to take a “stretch” IRA option and leave funds in the IRA for as long as possible, while taking RMDs (Required Minimum Distributions) based on their life expectancy. The stretch option is smart. However, a child who wants a new car or a down payment for a house, may not understand the impact of taxes on their inherited IRA. Make sure they see the numbers and how much of a bite taxes will take.
  • Can they do an IRA rollover? A spouse can rollover an inherited IRA into their own IRA or 401(k) but a non-spouse beneficiary cannot. If they do, the entire amount of the IRA becomes taxable income. There are no second chances. Make sure that the IRA custodian who will administer the IRA for your heirs automatically takes care of the RMDs, so they don’t have to worry about it. If they don’t take the RMDs, they’ll have to pay a hefty tax.
  • What taxes are due on an inherited annuity? Inherited annuities come with a variety of limitations and taxes. The insurance company will issue a 1099 for any untaxed growth to the heir. This must be included as gross income for that tax year. If the recipient isn’t expecting it or doesn’t know it’s a tax, it could come as an expensive surprise.
  • What is a “step-up in basis”? This applies to stocks, bonds and real estate. The value of the asset on the day you die is the cost basis to your heir. It is not what you paid for it originally. Let’s say you bought a second home for $300,000 and it appreciates to half a million dollars in value. If your child sells the house for more than $500,000—its value on the day of your death—any capital gains taxes will be calculated on the $500,000—the “stepped-up basis”—and not the $300,000 original cost or basis.
  • Who will have the details? Set up a family meeting with your estate planning attorney and your adult children at a time that works for all of you. They’ll be more comfortable in the days and weeks after your passing, if they know who they’ll be working with to settle your estate.

Reference: Kiplinger (April 3, 2018) “5 Financial Challenges Your Kids Will Face With Your Estate.

For more information on elder law, asset preservation and estate planning, please visit my estate planning website.

Mr. Amoruso concentrates his practice on Elder Law, Comprehensive Estate Planning, Asset Preservation, Estate Administration and Guardianship.