Will My Beneficiaries Inherit a Tax Burden?
Curtis has earned the Life and Health Insurance licensure, has passed the Series 66 examination, and has earned a degree from the University of Nevada, Reno. He has over 20 years of experience in the financial industry, helping others protect, grow and manage their wealth. Curtis helps clients create customized strategies for their portfolios based on their unique financial goals.
WILL MY BENEFICIARIES INHERIT A TAX BURDEN?
As the old saying goes, there are two things that are guaranteed in life and that is death and taxes. The problem with that is taxes don’t stop with death so how do we know if our beneficiaries will inherit a tax burden and that taxation on your money will continue after death? Let’s look at how your beneficiaries can be taxed and look at ways to avoid wanting to come back from the grave to haunt the IRS.
PRE-TAX MONIES
First, pre-tax monies such as a 401k, Traditional IRA, 457 etc. are taxable as income to you and to your beneficiaries. Therefore, if your beneficiary inherits any pre-tax money, they will be taxed on it. The other hard part of this is that they only have 10 years now to remove all the money from the account, while you as a retiree may have inherited a pre-tax account and had your lifetime to take out the Required Minimum Distributions, your beneficiaries will only have 10 years. So, they will essentially squeeze what used to be a lifetime tax burden into a decade of tax burden with a higher withdrawal and possibly higher tax amount.
CAPITAL GAINS
The other assets that can be subject to tax would be the capital gains on a non-qualified account (think an individual or joint account) that does not have a tax classification. Currently, there is a step up in cost basis from the date of death, which helps to lower that tax burden. The way that works is essentially if you bought a stock at $50 and when you passed away it was worth $100 dollars, the basis for the beneficiary would be the $100. They will only have to pay taxes on the gains from $100 not $50. There have been political discussions about this possibly changing in the future but as it stands, this is still the rule in place as I type this.
WHAT YOU CAN DO
So, how do we avoid creating a tax burden for our beneficiaries? The two easiest examples are Roth IRA and Life Insurance. There are other ways to get around creating taxable liability to your beneficiaries but these two are the most accessible and easiest to get into place. While not everyone likes or qualifies for life insurance, the benefit is still tax free to the beneficiary. The place where I put the most emphasis on is the Roth IRA. It is tax free to you, has tax free growth, and is tax free to your beneficiaries, so look at contributing to a Roth now or work on those Roth conversions with your financial professionals! To see what strategy makes the most sense for your financial and retirement situation, call our office at 775.853.9033.
Based in Reno, NV, Cornerstone is for individuals and families looking to grow wealth, protect and preserve their life savings, and plan for the distribution of their estate in a tax-efficient manner through a tailored strategy. Schedule a time to discuss your financial goals with us.
This information should also not be considered tax or legal advice. Individuals should consult with a professional specializing in the fields of tax, legal, and accounting regarding the applicability of this information for their situation.