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The Only Things in Life that Are Certain

I’m sure you’ve heard the saying, “Nothing is certain in life except death and taxes.” It’s kind of true, actually. And my job is to make sure that the “tax” part is kept to a minimum.

There are actually several different types of tax triggered at someone’s passing, including estate tax and income tax. Under the current tax code, estate tax only comes into play if you have more than $11.4 million in assets, so for the vast majority of us it doesn’t apply. But income tax is another story and that depends on what type of account is inherited, and whether beneficiaries have been named or not.

Bank accounts and non-retirement investment accounts are not taxable to your heirs. They get a “step-up” in tax basis, meaning any unrealized gains are wiped away and the inherited assets have a new, stepped up basis. Accounts are retitled into the heirs’ names and they’re done. Easy enough.

Pre-tax retirement accounts — these are the MOST complicated accounts to inherit, by far. They are taxable to your heirs as they receive distributions. Spouses have the unique ability to combine an IRA with their existing IRA and continue as if they always owned the account. They use their own age for Required Minimum Distribution (RMD) rules and wait until age 70 ½ to begin taxable withdrawals.

Non-spouse beneficiaries can take a lump-sum distribution, or withdraw the balance over 5 years, or transfer the balance into an Inherited IRA and begin taking RMDs based on their age. The most tax-advantageous method is to set up an Inherited IRA. But many times, beneficiaries don’t understand these options and inadvertently take a fully taxable lump-sum distribution. In that unfortunate circumstance, almost 40% of your hard-earned retirement account could go to the IRS rather than to your heirs.

An integral part of financial planning is ensuring that all beneficiaries are properly named, accounts are property titled and your estate planning structure is in place to avoid accidental taxation at your passing. If your financial professional isn’t talking to you about this critical topic, you should be talking to us instead. Contact us to set your complimentary meeting today.


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