<p>Worrytoomuch, are you referring to the kids needing to cash in the IRA 5 years after your death resulting in the high tax rates, or are you getting these tax rates even if you arrange for them to stretch the distribution over several decades based on their life expectancies? In the latter case won’t this be a large enough sum each year over their life span so that you wouldn’t need to provide additional tax sheltering?<br>
Our estate will be much lower and if the kids are educated on how not to cash in our retirement funds in a short period, taxes wouldn’t be a big issue. And we’ve already begun scaling back on term life insurance, and it’s likely that when our current 10 year terms expire in several years, we’ll drop it altogether. </p>
<p>Following up on posts about Stretch IRAs, just make sure that your primary and secondary beneficiaries are reviewed periodically and up-to-date. Most of us have our spouses as primary beneficiaries, but as we age and change our intentions, it might be advisable to put children or grandchildren as co-primary beneficiaries. That way, if the option of having the IRA descend directly to the heirs with the longest life expectancies is not defeated by close-in-time deaths. </p>
<p>My H’s parents died within two days of one another this year. MIL was already ill and it was expected she would pass soon. But FIL collapsed and died unexpected two days before she did, and this was after she had already gone into a coma. It was very difficult sorting things out and it has required multiple disclaimers to get the IRAs descended to the grandchildren. Also, not all financial institutions allow the same procedure. Therefore, in addition to making sure your beneficiaries are in place properly, it is a good idea to consult with the institution holding your IRAs to see how they would handle it once the original IRA owner dies. It is not always as straightforward as you hope and, unfortunately, you won’t know if your plan works. </p>
<p>I dealt with 5 different financial institutions to settle the ILs IRAs and have been impressed with 3 (Fidelity, Vanguard among them) out of the 5. One of them (a large company) has been an absolute nightmare. </p>
<p>AttorneyMother, my question was not the value of the stocks on the date of death, but the impact of tax-advantaged IRAs being inherited by children. Do they have to pay the taxes that we’re deferring?</p>
<p>Hayden, rejoining the conversation late so I may have missed things. But I believe that when the kids withdraw money from an inherited non-Roth IRA, they pay tax on the withdrawal at ordinary income tax rates. </p>
<p>We set up an irrevocable life insurance trust with term. In addition, ten plus years ago, congress probably with the lobbying of the insurance industry allowed the creation of 412(i) defined benefit plans. These allow for the purchase of whole life insurance plus other investments and to use a low forecasted interest rate allowing for a fair bit of savings. So it wasn’t hard to have save pre-tax $200k to $250k. As often happens with generally sensible tax-related things, promoters became abusive and the IRS went after 412(i) plans but by then I had switched it to another kind of DB plan that is not problematic and have whole life still in it. I have looked at getting rid of it but it is producing an attractive yield. Without the original structure, I would have stayed away from whole life, but I have been able to put away quite a bit pretax but am slowing that down. </p>
<p>I think that there is a reasonable to high probability that the $10.5 MM thresholdwill be lowered when the political pendulum swings the other way because of what I believe will be a much worsening gap between the top 10%, 1%, and 0.1% and the rest. </p>
<p>Anyone know where @DrGoogle is? Haven’t seen her around for awhile. Hoping she’s busy floating in the ocean in French Polynesia, and not anything bad.</p>
<p>“I think that there is a reasonable to high probability that the $10.5 MM thresholdwill be lowered when the political pendulum swings the other way because of what I believe will be a much worsening gap between the top 10%, 1%, and 0.1% and the rest”</p>
<p>Considering that, and the much lower threshold for certain states to tax, makes me wonder why people would even bother not to to spend what they like and give to whom they choose while they are still alive. Probably kids could use the money far more now, then when they are in their sixties and we (hopefully) pass away in our nineties or later.</p>
<p>Shawbridge, that is exactly my concerns. The kids will pay tax at the 40% tax rate as of today as ordinary income from the 401ks withdrawals. Also, totally agree with you regarding the $10.5MM threshold.</p>
<p>H and I are very open about our finances with the kids, they are only 18 and 15. Funds are available for their education. D knows how to transfer fund from her account to the school. Other funds are all tied up in investments. The insurance payout would let them have money ready for taxes within the year.</p>
<p>H is on the fence about the permanent life insurance. He is trying to simplify/consolidate the investment portfolio for me and the kids. The adviser actually complimented H on his investment strategies and said that the insurance would be an added benefit to maintain the assets, nothing else is needed.</p>
<p>We live a very simple life. The thought of having to pay over 100K a year until death scares me. </p>
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<p>Not getting this. If you live long enough to turn 70 1/2, you have to start RMD. Presumably, RMD is calculated to deplete the retirement account by the time you time and nothing left to pass onto heirs. Of course, withdrawals from non-Roth Ira should be taxed since the money in it is never taxed yet whether the withdrawals are made by retiree themselves or their heirs.</p>
<p>H is 60. He only has 10 years to start the RMD. Anyway, he will try to speed up the Roth conversion.
Thank you all for your input.</p>
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How did you come up with 40%? You don’t hit the top incremental rate until your income exceeds $400+K per year</p>
<p>The kids inherited my brother’s assets when he passed away a couple of years ago. </p>
<p>“The kids inherited my brother’s assets when he passed away a couple of years ago”</p>
<p>Then if they do a decent job of investing, shouldn’t they have plenty to pay for the taxes? It doesn’t sound like they’re going to avoid the taxes, just you will have an additional lump sum to help pay that off. And who knows, with the deficit hole we have going on around here, I wouldn’t put it past them to decide to make insurance taxable, past a certain income level or insurance amount. </p>
<p>If you have that much extra that you want to give them, why not just invest it, and consider it may help with the taxes? It’s not like the estate is in something that you really don’t want sold, like a home or a business. It’s just retirement funds, so if they have to sell some, so what? You are giving them plenty, in addition to what your brother has already. Should you put yourself in a position to be obligated for a huge payment every single year, just to cover the taxes, when it could be a mistake or a complete waste of money? This makes no sense to me. </p>
<p>That amount for insurance is like having two kids in college at full pay, until the day you die. No thanks. </p>
<p>In some states, the marginal rate for high incomes is > 40%, closer to 50%. </p>
<p>I don’t want this to be political; call it my personal philosophy. We have been very lucky, we work hard, and we don’t overspend. I don’t feel compelled to pay more taxes than what I owe, but I can’t see jumping through hoops to save my kids paying some in taxes. They are already luckier than 99.99% of kids in the world. I don’t need to add another “9” by entering into a convoluted investment I can’t understand the details of. </p>
<p>I inherited a total of $11k from my folks (which in the case of my mother, was less than I had given her so that she could have meds and eat without choosing between them). My kids are on track to do much better than that, and they are unlikely to have to send us money. </p>
<p>I’ve known multi-generational trust fund babies. Many of them were done no favors by not having to work. Some lives ended early and tragically. </p>
<p>@rockymthigh, the 66 steps at my late inlaws’ home are all outdoors. On the plus side, there is no snow or ice in Honolulu and the home is in an older, highly desired neighborhood and has been very easy to rent out. It has significant value as a rental or to tear down and rebuild. </p>
<p>“The adviser actually complimented H on his investment strategies and said that the insurance would be an added benefit to maintain the assets” - Of course he did… he’ll make money on that insurance policy. </p>
<p>My concern is that if there were ever a reason you had to stop funding the policy, the $100K/yr at younger ages (least likelihood of death) will have been for naught. </p>
<p>Regarding paying the premiums and how often policies lapse:</p>
<p>From The White Coat Investor <a href=“Whole Life Insurance for Doctors | White Coat Investor”>http://whitecoatinvestor.com/the-statistic-whole-life-salesmen-dont-want-you-to-know/</a>. There’s an interesting chart there, but I don’t know how to paste it in here. </p>
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<p>I can see a discussion like, “Kids, I have good news and bad news for you. The bad news is that you’ll have to pay 40 million in taxes upon our death. The good news is, you’ll inherit 100 million, so that might allieve your suffering a bit.” </p>
<p>Suze Orman said don’t ever buy whole or universal life insurance. Instead only buy term insurance. She also said term insurance is cheap. She says insurance and investments should always be kept separate. She says you can buy a 500,000 policy for around $40 dollars a month. She did say whole life can be around $500 a month and it is a rip off. She also says to buy term insurance if someone is dependent on you. </p>
<p>There are people that have assets that are passed from generation to generation but they cannot sell it or they don’t want to have to sell it to pay for taxes. So term insurance is benefical if you don’t have cash. Its an option to get cash quickly.</p>
<p>I’m not sure why it would cost 100k per year for insurance. You ought to look into term insurance. Hopefully that is much cheaper. </p>
<p>Take a look at this: <a href=“https://www.intelliquote.com/”>https://www.intelliquote.com/</a> I did a quick quote for $10M (just picked a number out of the blue) term fixed for 10 years and it came to $6,900/year. </p>
<p>However, I don’t know all the particulars and maybe I misunderstood what you are saying so I’m just giving suggestions on what little I know! :)</p>
<p>We were doing fine until the adviser suggested life insurance. He does not sell insurance. H did research and bought the “Ed Slott (?)” book, that was when all the fun started. </p>
<p>At this point, I don’t think H will go for the insurance option.</p>
<p>I am sure it depends on the age. If you are 40 years old getting a 10year term, the rate will be low naturally. If you are 80 years old getting a 20 year term, the rate will certainly be high since it’s alomost guaranteed they will pay out the sum.</p>