Legacy Strategy: Reducing One's Estate

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
MrLoco
Posts: 32
Joined: Fri Apr 23, 2021 11:40 am

Legacy Strategy: Reducing One's Estate

Post by MrLoco »

Hello all. I am 62 and my wife is 61. Both retired with net assets of around $6.3 million and an overall 50/50 equities/fixed income AA. About 1.8 M in a Trad IRA and 1.0 M in ROTH Ira's. Balance is in taxable.

My number one priority has been to secure a comfortable retirement. Believe we can do that with 2 current pensions and delaying 2 SS benefits for both of us until age 70. The second priority was to do Roth conversions to reduce the size of the Trad. IRA and the tax implications when RMD's begin at age 72. Another priority, which now seems to supersede Roth Conversions, is gifting to our children to deal with any changes in the estate tax threshold. We currently have a state estate tax threshold which is very low. Plus the children could use the money now.

So now I am thinking we can accomplish 2 things at once. My thought is instead of withdrawing funds from the Trad IRA to do a Roth Conversion......simply withdraw the same amount from the Trad IRA ( sell not exchange) ; pay the taxes out of taxable and gift the money to the children. Understand CPA would need to submit a gift tax return. This would reduce our Trad IRA to mitigate future RMD's and allow us to gift every year to the children.

I might withdraw 100,000 - 150,000 every year from the Trad IRA and understand we would be hit with IRMMA increased premiums in future years , but if the overall goal right now is gifting....then why not? Anyone else doing this?
User avatar
David Jay
Posts: 14586
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Legacy Strategy: Reducing One's Estate

Post by David Jay »

Welcome to the forum!
MrLoco wrote: Fri Apr 23, 2021 11:59 amAnother priority, which now seems to supersede Roth Conversions, is gifting to our children to deal with any changes in the estate tax threshold.
I believe strongly in gifting to (adult) children when they need it and when we can enjoy seeing them benefit from the gifts.

One problem with large gifts is that they are recorded and count against any future estate tax threshold. So if you are concerned about future estate tax changes (per your quote above), large gifts do not help. I would limit gifts to sizes that do not entail gift reporting.

Each of you can gift $15,000 per year to any individual without triggering gift tax reporting. Thus, you can transfer $30,000 ($15,000 each) to each child each year without reporting. You did not say how many children you have but you said "children" so I presume at least 2. Two children means $60,000 a year. If they each have spouses then it can be $120,000 a year where each of you give $15,000 to each child and also give $15,000 to each spouse. All without using any future estate credits.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
User avatar
Wiggums
Posts: 7050
Joined: Thu Jan 31, 2019 7:02 am

Re: Legacy Strategy: Reducing One's Estate

Post by Wiggums »

I agree with David Jay. I would save the estate tax exemption for now.
"I started with nothing and I still have most of it left."
Topic Author
MrLoco
Posts: 32
Joined: Fri Apr 23, 2021 11:40 am

Re: Legacy Strategy: Reducing One's Estate

Post by MrLoco »

I understand what you are both saying. Problem is we have 2 adult children with no spouses/ grandchildren.
So as of now we could only give a max of $60,000/ year between my wife and myself.
Problem is the Trad IRA account has been growing at a faster rate ( more than $60,000/year); and yes while utilizing the annual gift tax exclusion of $15,000 would help mitigate future RMD's a little,
each year the IRA continues to grow. Which is why I thought about doing a larger withdrawal and hence a larger gift might be an option.
Of course a severe market correction would also solve this problem.
stuper1
Posts: 508
Joined: Tue Apr 03, 2018 9:30 am

Re: Legacy Strategy: Reducing One's Estate

Post by stuper1 »

You're currently worried about state estate tax. Does your state have the same $15k annual limit on non-reportable gifting as the IRS?

You can also use a trust to avoid estate taxes I believe.
A 10-20% allocation to gold has helped with the sequence of returns problem. Some gold held physically is also good insurance against the all-digital-assets problem.
KlangFool
Posts: 31525
Joined: Sat Oct 11, 2008 12:35 pm

Re: Legacy Strategy: Reducing One's Estate

Post by KlangFool »

OP,

Give your kids the money to maximize their Trad 401K and Roth IRA contribution. That would increase their tax saving and maximize your gifts' benefits.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
afan
Posts: 8191
Joined: Sun Jul 25, 2010 4:01 pm

Re: Legacy Strategy: Reducing One's Estate

Post by afan »

Giving money to your kids is your goal. Recommending you do not do that is not helpful.
Then the question is how to do the gifts.
The proposed strategy will bump up your income taxes and as you say, increase your Medicare costs.
An alternative would be to give the money from your taxable account, if you have enough. This would let you reduce your estate without paying extra income taxes on distributions from your tIRA.

You could continue to do Roth conversions. These will have the same effects on taxes and Medicare, but you would be better off doing any GIFTING from taxable account, rather than from the tIRA.

If you do not have enough in your taxable account, then taking from your tIRA is the only way to do it.

No one knows what will happen with federal estate tax exclusion amounts. Your networth is not so high that it is clear you would have a taxable estate even after a reduction. If your state has a low exclusion amount then whether you make yourself better off depends on whether they have a state gift tax or add back gifts in calculating estate taxes.
Last edited by afan on Fri Apr 23, 2021 4:26 pm, edited 1 time in total.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
User avatar
retired@50
Posts: 12821
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Legacy Strategy: Reducing One's Estate

Post by retired@50 »

MrLoco wrote: Fri Apr 23, 2021 1:06 pm Problem is the Trad IRA account has been growing at a faster rate ( more than $60,000/year); and yes while utilizing the annual gift tax exclusion of $15,000 would help mitigate future RMD's a little,
each year the IRA continues to grow. Which is why I thought about doing a larger withdrawal and hence a larger gift might be an option.
Of course a severe market correction would also solve this problem.
How is the money inside the Trad IRA invested?

Is it all in bonds?, if not, that might help slow down the annual growth.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
User avatar
Watty
Posts: 28859
Joined: Wed Oct 10, 2007 3:55 pm

Re: Legacy Strategy: Reducing One's Estate

Post by Watty »

With your net worth estate planning is not a good thing to try on your own, you really need to get a layer or account involved help you come up with a plan.
User avatar
celia
Posts: 16774
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Legacy Strategy: Reducing One's Estate

Post by celia »

You have a lot in Tax-deferred and enough in taxable to pay all taxes that were deferred. You knew this was coming, right? That’s why you’re smart to get a headstart by doing withdrawals or Roth conversions early.

You will pay the same taxes whether you convert or withdraw to taxable and those taxes will come out of taxable. No disagreements so far.

Let’s say you are thinking of giving each child $80K and converting $200K. You would pay taxes on $360K. But if you converted all $360K instead and gave each child $80K from Taxable, you would end up with the same result, except more money will be in Roth where it will continue to grow tax-free.

Your proposal takes $80K + $80K out of tax-deferred and puts it in Taxable, where it is given away, ending up with the same balance minus taxes. Mine leaves taxable with $160K less and minus taxes, but Roth is $160K bigger.

Give them what they need, but not so much that they increase their standard of living to something that is not sustainable for them (eg, a house downpayment towards a house they can’t afford to maintain). They will still be getting money from you after you die but meanwhile, while you are living, and for 10 years after you die, they won’t have to pay any taxes on it, if it is in Roth.

(I intentionally didn’t split the tax-deferred withdrawals in half because I wanted the example to be easier to understand. But the same math holds if your kids get half of what is withdrawn.)


:oops: edit to add:
I could have said this whole thing simpler—
Your proposal is the same thing as if you had converted the whole amount, then immediately turned around and withdrew from the Roth to give the gifts, when they could have easily been made from taxable instead!
(The Roth withdrawals assume you are over 59.5, which you both are, and the Roths have been open at least 5 years.)
Last edited by celia on Fri Apr 23, 2021 2:29 pm, edited 1 time in total.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
User avatar
celia
Posts: 16774
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Legacy Strategy: Reducing One's Estate

Post by celia »

MrLoco wrote: Fri Apr 23, 2021 11:59 am Hello all. I am 62 and my wife is 61. Both retired with net assets of around $6.3 million and an overall 50/50 equities/fixed income AA. About 1.8 M in a Trad IRA and 1.0 M in ROTH Ira's. Balance is in taxable.
You didn’t break down what the AA is in each type of account, but to be tax-efficient, the Roths should hold the assets expected to grow the fastest (stock funds) while the TIRAs should hold bonds (to slow down the growth and because interest does not get any tax breaks in taxable).
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
User avatar
celia
Posts: 16774
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Legacy Strategy: Reducing One's Estate

Post by celia »

Watty wrote: Fri Apr 23, 2021 1:34 pm With your net worth estate planning is not a good thing to try on your own, you really need to get a layer or account involved help you come up with a plan.
A lawyer or accountant can’t change the rules or RMDs or withdrawals from tax-deferred accounts. The taxes were tax-deferred and will be due soon, so this is a math problem of how to have the most spendable money in the long run.

But if OP wants information on how their Taxable assets can be changed via trusts or charitable giving or legacy planning in conjunction with estate planning, then they could be of use.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
User avatar
CAsage
Posts: 3539
Joined: Sun Mar 27, 2016 6:25 pm

Re: Legacy Strategy: Reducing One's Estate

Post by CAsage »

You don't specify what your net assets are invested in. A brief breakdown of the assets in Roth vs IRA vs brokerage would allow for good input... I would second Celia's suggestion to look into maximizing that Roth account by converting anyway, pay the taxes and gift your children out of the taxable account. Other considerations are the current capital gains on that taxable account, or is it real estate? I'm beginning to view paying taxes sooner on Roth conversions is a win-win - I shelter lots more money in the Roth which our children will inherit and can then stretch out 10 years after my passing, and it reduces my "phantom" estate. The government effectively "owns" a big chunk of my IRA currently... and they will get their money sooner or later.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.
Jack FFR1846
Posts: 18499
Joined: Tue Dec 31, 2013 6:05 am
Location: 26 miles, 385 yards west of Copley Square

Re: Legacy Strategy: Reducing One's Estate

Post by Jack FFR1846 »

You're looking to do several things, all linked together. You do not need to link them together.

You want to reduce your tIRA balance to reduce RMDs. Well, ok. I assume your income tax bracket is lower now than you expect it will be when you're 72. If that's not the case, then you need to rethink. Do the math.

As others mentioned, you can take out what you want, pay taxes and do what you want with the money. Give it to your kids, buy a Lamborghini...whatever. :shock:

On the gifting side, I get the low limit, living in Massachusetts. You do need to be careful because going over the federal limit for reporting reduces your state limit below $1M and means taxes happen at a lower level back to dollar #1. You already know about gifting from you as a couple to your kids to double up. In addition, you can pay college tuition AND medical bills and neither is counted towards gifting. This doesn't mean you can pay insurance premiums but when they are paying deductibles and co-pays and such, you can pay the providers directly. You can't pay your kids back after they pay the bills, but if they get a bill and send it to you, then you can pay it and it is not counted towards a gift.
Bogle: Smart Beta is stupid
User avatar
illumination
Posts: 3173
Joined: Tue Apr 02, 2019 6:13 pm

Re: Legacy Strategy: Reducing One's Estate

Post by illumination »

Jack FFR1846 wrote: Fri Apr 23, 2021 3:38 pm In addition, you can pay college tuition AND medical bills and neither is counted towards gifting. This doesn't mean you can pay insurance premiums but when they are paying deductibles and co-pays and such, you can pay the providers directly.
I've seen elsewhere where a person directly paying a health insurance premium is acceptable and doesn't count towards the gift limit.

Is this an issue of contention among estate attorneys?

"But there is something else that can be done! They can pay their child’s health insurance premium, in unlimited amounts. (See, Treasury Regulation 25.2503-6(3))."

https://huntestatelaw.com/the-gift-of-health-insurance/
User avatar
FIREchief
Posts: 6916
Joined: Fri Aug 19, 2016 6:40 pm

Re: Legacy Strategy: Reducing One's Estate

Post by FIREchief »

MrLoco wrote: Fri Apr 23, 2021 11:59 am About 1.8 M in a Trad IRA
Do you have LTC insurance? If not, you may wish to keep at least $1M in that tIRA to cover nursing home costs in the future. Under current law, most of those could be withdrawn from a tIRA without paying taxes.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
User avatar
TomatoTomahto
Posts: 17158
Joined: Mon Apr 11, 2011 1:48 pm

Re: Legacy Strategy: Reducing One's Estate

Post by TomatoTomahto »

Jack FFR1846 wrote: Fri Apr 23, 2021 3:38 pm You do need to be careful because going over the federal limit for reporting reduces your state limit below $1M and means taxes happen at a lower level back to dollar #1.
File this under “pennies from heaven,” but the tax rate is still 0% on the first $40,000 :D So, it’s like a cliff with one little step down before you fall a thousand feet.
I get the FI part but not the RE part of FIRE.
Rajsx
Posts: 1014
Joined: Wed Mar 21, 2007 10:07 pm
Location: Florida

Re: Legacy Strategy: Reducing One's Estate

Post by Rajsx »

We find ourselves in a similar circumstance with gifting to our adult children,
We limit gifting to $30k from Taxable to each of the two kids, & not cross into Gift Tax territory. & Roth Convert up to top of 22% MFJ or as is in the last year up to 24%.

In the interest of learning from this thread If I may share our details & request your feedback please,

We have investable assets of around $8 million, our overall Asset Allocation is 60/40, I am 65 & DW 60 & we are entering retirement, Our living expenses will be only from our investments + Social Security at age 70.

Taxable are around $ 6 million -
Total Stock Market Index VTSAX -$ 3106 k
Total International Stock VTIAX -$ 1525 k
Interm Term Tax Exempt Bond VWIUX -$ 1078 k
Cash - Banks & CDs -$ 347 k

Tax Deferred IRAs are around $ 1.8 million -
Total International Bond Index VTABX - $ 282 k
Total Bond Index VBTLX - $ 1527 k

Roth IRAs in VTSAX - $ 405 k
HSAs - $ 18 k

Our Fidelity Donor Advised Fund with moderate allocation is used for Charity

Although I have 7 more yrs to reach age 72 for Roth Conversions, I suspect we may end up in higher tax brackets with RMDs .
The kids will have the step up in basis(if still there) on inheriting from the taxable funds on our passing.

Is there something I am missing or is there a better way of managing our gifting, roth conversions or taxes ??
Thankyou in advance
Leesbro63
Posts: 10638
Joined: Mon Nov 08, 2010 3:36 pm

Re: Legacy Strategy: Reducing One's Estate

Post by Leesbro63 »

What about the old Life Insurance Trust method, where the trust owns life insurance on you, your spouse, both individually or second to die? Where you gift to the Trust each year? Wasn't this how many leveraged estate assets before death back in the days of the $600,000 (or even lower) estate tax exemption?
bsteiner
Posts: 9208
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: Legacy Strategy: Reducing One's Estate

Post by bsteiner »

Leesbro63 wrote: Fri Apr 23, 2021 5:47 pm What about the old Life Insurance Trust method, where the trust owns life insurance on you, your spouse, both individually or second to die? Where you gift to the Trust each year? Wasn't this how many leveraged estate assets before death back in the days of the $600,000 (or even lower) estate tax exemption?
If you live close to, to, or beyond your life expectancy, the trust will have more money if the trustees invest the amounts they would otherwise pay in insurance premiums in other assets, assuming a reasonable return on the other assets. The policyholders and their beneficiaries will collectively earn what the insurance company earns on its investments (mainly bonds), less what it costs to run the insurance company. You would have to die substantially before your life expectancy for the trust to be better off investing in life insurance.
Rajsx
Posts: 1014
Joined: Wed Mar 21, 2007 10:07 pm
Location: Florida

Re: Legacy Strategy: Reducing One's Estate

Post by Rajsx »

FIREchief wrote: Fri Apr 23, 2021 4:02 pm
MrLoco wrote: Fri Apr 23, 2021 11:59 am About 1.8 M in a Trad IRA
Do you have LTC insurance? If not, you may wish to keep at least $1M in that tIRA to cover nursing home costs in the future. Under current law, most of those could be withdrawn from a tIRA without paying taxes.
I learnt something new today, thanks. So no taxes are due if TIRA funds are going to pay Nursing Home costs, good to know
JimInIllinois
Posts: 405
Joined: Wed Dec 22, 2010 8:55 am

Re: Legacy Strategy: Reducing One's Estate

Post by JimInIllinois »

Rajsx wrote: Fri Apr 23, 2021 7:42 pm
FIREchief wrote: Fri Apr 23, 2021 4:02 pm
MrLoco wrote: Fri Apr 23, 2021 11:59 am About 1.8 M in a Trad IRA
Do you have LTC insurance? If not, you may wish to keep at least $1M in that tIRA to cover nursing home costs in the future. Under current law, most of those could be withdrawn from a tIRA without paying taxes.
I learnt something new today, thanks. So no taxes are due if TIRA funds are going to pay Nursing Home costs, good to know
I assume this is just referring to using the medical expense deduction against taxable IRA withdrawals.
User avatar
celia
Posts: 16774
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Legacy Strategy: Reducing One's Estate

Post by celia »

Rajsx wrote: Fri Apr 23, 2021 7:42 pm
FIREchief wrote: Fri Apr 23, 2021 4:02 pm Do you have LTC insurance? If not, you may wish to keep at least $1M in that tIRA to cover nursing home costs in the future. Under current law, most of those could be withdrawn from a tIRA without paying taxes.
I learnt something new today, thanks. So no taxes are due if TIRA funds are going to pay Nursing Home costs, good to know
Rajsx, we don’t want to give you inaccurate information, and it is easy to come to the wrong conclusion here, so let me clarify.

There is no rule or exception that tax-deferred withdrawals used for nursing home care or long term care would be exempt from taxes. That is just a one line conclusion of this scenario:

If you are in a nursing home or LTC facility for an extended period, you can probably save income taxes by itemizing these costs instead of taking the standard deduction. But you can only itemize these expenses for the part that is over 7.5% of your AGI. And you also need a doctor’s letter saying these placements are medically necessary because of your cognitive decline or unable to do 2 or more Activities of Daily Living (ADLs) [such at feeding yourself, able to use the toilet by yourself, able to transport (change positions/walk ) by yourself,etc]

If this still applies to you, these deductions would lower your income. So if you pay the costs of nursing home or LTC, tax-deferred withdrawals can be done in such an amount that the expenses and withdrawals cancel each other out. That is what we mean.

For more information, see IRS Pub, 502, under Long-Term Care.
User avatar
celia
Posts: 16774
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Legacy Strategy: Reducing One's Estate

Post by celia »

Rajsx wrote: Fri Apr 23, 2021 5:33 pm Although I have 7 more yrs to reach age 72 for Roth Conversions, I suspect we may end up in higher tax brackets with RMDs .
The kids will have the step up in basis(if still there) on inheriting from the taxable funds on our passing.

Is there something I am missing or is there a better way of managing our gifting, roth conversions or taxes ??
Rajsx, Although your portfolio size is similar to the OP’s, the difference between the two of you appears to be that the OP has already created a Roth conversion plan, whereas you are new to thinking about Roth conversions in much detail.

To get started on the right path, I suggest you read the first page of this thread and follow my links there. The first link should help you see if you need to convert or not. The second link is to a sample plan created in a spreadsheet.

If you have further questions, after doing the calculations I recommend, please start a new thread specific to your own situation with what you want help with. We have lots of people here with experience who are willing to answer questions.
Last edited by celia on Fri Apr 23, 2021 9:44 pm, edited 1 time in total.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
wolf359
Posts: 3207
Joined: Sun Mar 15, 2015 8:47 am

Re: Legacy Strategy: Reducing One's Estate

Post by wolf359 »

celia wrote: Fri Apr 23, 2021 9:22 pm
Rajsx wrote: Fri Apr 23, 2021 7:42 pm
FIREchief wrote: Fri Apr 23, 2021 4:02 pm Do you have LTC insurance? If not, you may wish to keep at least $1M in that tIRA to cover nursing home costs in the future. Under current law, most of those could be withdrawn from a tIRA without paying taxes.
I learnt something new today, thanks. So no taxes are due if TIRA funds are going to pay Nursing Home costs, good to know
Rajsx, we don’t want to give you inaccurate information, and it is easy to come to the wrong conclusion here, so let me clarify.

There is no rule or exception that tax-deferred withdrawals used for nursing home care or long term care would be exempt from taxes. That is just a one line conclusion of this scenario:

If you are in a nursing home or LTC facility for an extended period, you can probably save income taxes by itemizing these costs instead of taking the standard deduction. But you can only itemize these expenses for the part that is over 7.5% of your AGI. And you also need a doctor’s letter saying these placements are medically necessary because of your cognitive decline or unable to do 2 or more Activities of Daily Living (ADLs) [such at feeding yourself, able to use the toilet by yourself, able to transport (change positions/walk ) by yourself,etc]

If this still applies to you, these deductions would lower your income. So if you pay the costs of nursing home or LTC, tax-deferred withdrawals can be done in such an amount that the expenses and withdrawals cancel each other out. That is what we mean.

For more information, see IRS Pub, 502, under Long-Term Care.
If you're in cognitive decline, would you be able to file taxes while itemizing the relevant medical expenses in accordance with IRS Publication 502?
User avatar
celia
Posts: 16774
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Legacy Strategy: Reducing One's Estate

Post by celia »

If you are in cognitive decline, hopefully you would have already created estate planning documents such as Durable Power of Attorney, a Medical Power of Attorney, possibly a trust or will, and your trusted agent knows what is going on and will thus start to take action on your behalf. If you are now creating a Roth conversion plan s/he also needs to understand your plan.

Don’t wait until you can no longer have these documents created (when the lawyers can’t tell what you want).
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
User avatar
FIREchief
Posts: 6916
Joined: Fri Aug 19, 2016 6:40 pm

Re: Legacy Strategy: Reducing One's Estate

Post by FIREchief »

Rajsx wrote: Fri Apr 23, 2021 7:42 pm
FIREchief wrote: Fri Apr 23, 2021 4:02 pm
MrLoco wrote: Fri Apr 23, 2021 11:59 am About 1.8 M in a Trad IRA
Do you have LTC insurance? If not, you may wish to keep at least $1M in that tIRA to cover nursing home costs in the future. Under current law, most of those could be withdrawn from a tIRA without paying taxes.
I learnt something new today, thanks. So no taxes are due if TIRA funds are going to pay Nursing Home costs, good to know
See celia's responses. I just gave you the Cliff's notes version. Or the 50,000 ft version if you will. The point is that LTC generates huge amounts of qualified medical expenses, which are currently largely deductible (subject to 7.5% AGI, standard deduction offset, etc.). Unlike Roth conversions, the RMDs don't penalize a person in this situation. If I have a $100K RMD, $100K of SNF fees and $40K of other income, I can pay no taxes on up to ~$90K of the RMD. See my signature.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
Leesbro63
Posts: 10638
Joined: Mon Nov 08, 2010 3:36 pm

Re: Legacy Strategy: Reducing One's Estate

Post by Leesbro63 »

bsteiner wrote: Fri Apr 23, 2021 6:10 pm
Leesbro63 wrote: Fri Apr 23, 2021 5:47 pm What about the old Life Insurance Trust method, where the trust owns life insurance on you, your spouse, both individually or second to die? Where you gift to the Trust each year? Wasn't this how many leveraged estate assets before death back in the days of the $600,000 (or even lower) estate tax exemption?
If you live close to, to, or beyond your life expectancy, the trust will have more money if the trustees invest the amounts they would otherwise pay in insurance premiums in other assets, assuming a reasonable return on the other assets. The policyholders and their beneficiaries will collectively earn what the insurance company earns on its investments (mainly bonds), less what it costs to run the insurance company. You would have to die substantially before your life expectancy for the trust to be better off investing in life insurance.
An interesting observation. Something to think about.
User avatar
Mullins
Posts: 496
Joined: Wed May 08, 2019 4:38 pm

Re: Legacy Strategy: Reducing One's Estate

Post by Mullins »

I believe the IRS has ruled (in 2019) if a person makes large gifts, and the exemption amount is reduced in a later year to an amount below the value of the previous gifts, those gifts would be grandfathered and no tax will be due. If a lower estate threshold is passed this year it might be retroactive to Jan. 2021. So it may be wise to see if by later this year anything's getting enacted because if not, then it may be a good move to make a large gift.

Though then again, if the threshold is lowered, the effective date may be on that date and not retroactive at all. In which case one may wish to make a large gift while they can.

All this is to say, I don't know.
"The Quality of the Answer Depends on the Quality of Your Question."
Leesbro63
Posts: 10638
Joined: Mon Nov 08, 2010 3:36 pm

Re: Legacy Strategy: Reducing One's Estate

Post by Leesbro63 »

Mullins wrote: Sat Apr 24, 2021 11:18 am I believe the IRS has ruled (in 2019) if a person makes large gifts, and the exemption amount is reduced in a later year to an amount below the value of the previous gifts, those gifts would be grandfathered and no tax will be due. If a lower estate threshold is passed this year it might be retroactive to Jan. 2021. So it may be wise to see if by later this year anything's getting enacted because if not, then it may be a good move to make a large gift.

Though then again, if the threshold is lowered, the effective date may be on that date and not retroactive at all. In which case one may wish to make a large gift while they can.

All this is to say, I don't know.
With a $6.3M joint estate, the OP would have to nearly impoverish himself to take advantage of today’s $11+M per person estate tax exemption in anticipation of a much lower threshold. The only people who can really benefit from current exemption amounts versus the halving of that in 2026 are the ultra wealthy.
exoilman
Posts: 881
Joined: Wed Oct 15, 2008 1:38 pm
Location: New Jersey

Re: Legacy Strategy: Reducing One's Estate

Post by exoilman »

Reference
Leesbro63
Posts: 10638
Joined: Mon Nov 08, 2010 3:36 pm

Re: Legacy Strategy: Reducing One's Estate

Post by Leesbro63 »

exoilman wrote: Sun Apr 25, 2021 6:27 amReference
Unless the OP gifts more than the 2026 (about) $6M per person, whatever he gifts will be counted, when he dies, against his estate exemption at that time. If he gifts $8m now, the $2M excess won’t count later. “He wins” as the IRS says it won't be "clawed back". But if the OP "only" gifts $2M now, that $2M will be counted against his $6M exemption when he dies. It would be even more significant if the estate tax exemption is made even lower, but that can’t be further discussed. Gifting now, in that case, would not let the OP take advantage of the higher estate tax exemption now versus what the law now says it will be in 2026. (It would, however, allow future growth to be out of his estate, but the cost is high as he has to give up 1/3rd of his wealth for that unquantifiable benefit). Most healthy 60something people with $6M aren’t gonna gift $2M of that.

For this to work to the fullest extent, a couple would have to gift (about) $24M now, to "win" by seeing about half of that “forgiven” or not "clawed back”. And by most definitions, you’d have to be ultra wealthy to be able to gift $24M in your 60s and still be comfortable that you'll have enough to maintain your lifestyle (which, one would assume, would be "FATFIRE") for another 25-35 year joint life expectancy.
User avatar
illumination
Posts: 3173
Joined: Tue Apr 02, 2019 6:13 pm

Re: Legacy Strategy: Reducing One's Estate

Post by illumination »

Leesbro63 wrote: Sun Apr 25, 2021 6:12 am
Mullins wrote: Sat Apr 24, 2021 11:18 am I believe the IRS has ruled (in 2019) if a person makes large gifts, and the exemption amount is reduced in a later year to an amount below the value of the previous gifts, those gifts would be grandfathered and no tax will be due. If a lower estate threshold is passed this year it might be retroactive to Jan. 2021. So it may be wise to see if by later this year anything's getting enacted because if not, then it may be a good move to make a large gift.

Though then again, if the threshold is lowered, the effective date may be on that date and not retroactive at all. In which case one may wish to make a large gift while they can.

All this is to say, I don't know.
With a $6.3M joint estate, the OP would have to nearly impoverish himself to take advantage of today’s $11+M per person estate tax exemption in anticipation of a much lower threshold. The only people who can really benefit from current exemption amounts versus the halving of that in 2026 are the ultra wealthy.
But the OP's state has its own estate tax at a much lower threshold. Also, in the early 2000's before tax law changed, the exemption for the federal estate tax threshold was only $675,000 and then taxed at 55%.

So it's not crazy he has concerns moving forward, especially when he's saying both him and his wife each have a pension plus upcoming social security and the assets will continue to grow. $6.3m at 5% growth over 20 years is $16.7 million. At age 62/61, that's not outlandish that it could land on a number like that.

I personally think he should start out with max annual gifting and be aggressive with Traditional IRA conversions to Roth if his goal is maximizing the estate's value for his heirs and see where things are in 10 years.
Leesbro63
Posts: 10638
Joined: Mon Nov 08, 2010 3:36 pm

Re: Legacy Strategy: Reducing One's Estate

Post by Leesbro63 »

illumination wrote: Sun Apr 25, 2021 11:05 am
Leesbro63 wrote: Sun Apr 25, 2021 6:12 am
Mullins wrote: Sat Apr 24, 2021 11:18 am I believe the IRS has ruled (in 2019) if a person makes large gifts, and the exemption amount is reduced in a later year to an amount below the value of the previous gifts, those gifts would be grandfathered and no tax will be due. If a lower estate threshold is passed this year it might be retroactive to Jan. 2021. So it may be wise to see if by later this year anything's getting enacted because if not, then it may be a good move to make a large gift.

Though then again, if the threshold is lowered, the effective date may be on that date and not retroactive at all. In which case one may wish to make a large gift while they can.

All this is to say, I don't know.
With a $6.3M joint estate, the OP would have to nearly impoverish himself to take advantage of today’s $11+M per person estate tax exemption in anticipation of a much lower threshold. The only people who can really benefit from current exemption amounts versus the halving of that in 2026 are the ultra wealthy.
But the OP's state has its own estate tax at a much lower threshold. Also, in the early 2000's before tax law changed, the exemption for the federal estate tax threshold was only $675,000 and then taxed at 55%.

So it's not crazy he has concerns moving forward, especially when he's saying both him and his wife each have a pension plus upcoming social security and the assets will continue to grow. $6.3m at 5% growth over 20 years is $16.7 million. At age 62/61, that's not outlandish that it could land on a number like that.

I personally think he should start out with max annual gifting and be aggressive with Traditional IRA conversions to Roth if his goal is maximizing the estate's value for his heirs and see where things are in 10 years.
There’s no doubt that if the OP gifts his entire nest egg under current law, he won’t have to worry about scheduled or not yet scheduled changes. And the nest egg will grow out of his (joint) estate. I’m just saying that from a Federal estate tax perspective, you have to really be ultra wealthy to get the maximum arbitrage “no future clawback” of today’s historically large estate tax exemption against the future.
prairieman
Posts: 509
Joined: Thu Mar 01, 2018 2:17 pm

Re: Legacy Strategy: Reducing One's Estate

Post by prairieman »

I don’t know if this is on the table, but you could eventually move to a state with no estate tax. The move itself would more than pay for the new house - in terms of avoided state estate taxes. Maybe you have family and friends where you live, but who knows 10 or 20 years from now? The savings could be huge, especially if your estate has grown by 2 to 4x.
Leesbro63
Posts: 10638
Joined: Mon Nov 08, 2010 3:36 pm

Re: Legacy Strategy: Reducing One's Estate

Post by Leesbro63 »

prairieman wrote: Mon Apr 26, 2021 8:24 am I don’t know if this is on the table, but you could eventually move to a state with no estate tax. The move itself would more than pay for the new house - in terms of avoided state estate taxes. Maybe you have family and friends where you live, but who knows 10 or 20 years from now? The savings could be huge, especially if your estate has grown by 2 to 4x.
The problem with that is the the OP has to pay for the house with real money now; the benefit will be to his heirs later.
prairieman
Posts: 509
Joined: Thu Mar 01, 2018 2:17 pm

Re: Legacy Strategy: Reducing One's Estate

Post by prairieman »

Leesbro63 wrote: Mon Apr 26, 2021 8:35 am
prairieman wrote: Mon Apr 26, 2021 8:24 am I don’t know if this is on the table, but you could eventually move to a state with no estate tax. The move itself would more than pay for the new house - in terms of avoided state estate taxes. Maybe you have family and friends where you live, but who knows 10 or 20 years from now? The savings could be huge, especially if your estate has grown by 2 to 4x.
The problem with that is the the OP has to pay for the house with real money now; the benefit will be to his heirs later.
True, but for me, at least, I think about it. I am in similar position to the OP and have a kid who is raising a family in a warmer state with no estate taxes. I don’t want to move now because I love where I live - both house and location. But if friends, family, and/or spouse pass away and health declines, there will be incentive to downsize - perhaps to a state with no estate tax.
Post Reply