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what's the best way to plan this estate going forward

Home Estate Planning what's the best way to plan this estate going forward

  • Avatar JBME 
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    Status: Spouse
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    My mother is 71 and in okay health and living in FL. Due to a lot of spending (mostly due to the fact that she owns 2 4000+sqft homes) she’s in the 24% federal bracket but at least her state tax is 0%. My brother and I both live in high-tax states and make decent money….I’m in the 32% federal bracket + nearly 10% state and my brother is in the 35% federal bracket + 10% state+city tax (he’s in NYC, yay, city income tax). We’re both in our mid-to-late 30s. My mother is financially uneducated and has an irrational fear of running out of money. Here are some numbers:

    $750 SS per month

    $1.1m taxable account she inherited when her mother passed away 4 years ago (her mother also left her the house, which is why she has 2 homes, and after 4 years she still hasn’t gotten rid of it, and she’s not close to doing so)

    $1-$1.5m in an IRA

    ~$30k in a Roth IRA

    Do you all have recommendations for how she can best plan her estate going forward? She says her intention is to leave a little to charity but wants to leave the great majority to her family, which is me and my 3 kids along with my brother who currently has no kids. The $1.1m in her taxable account she says is what my grandmother wanted my brother and I to inherit, so she’s generally against spending in it. When asked why she inherited the money (which is now in a revocable trust) instead of my brother and I, who were in our early 30s when our grandmother passed, we were told we were “too young” to inherit such money. Yet she’s financially inept but whatever I guess.

    I understand the taxable account will get a step-up basis when my mother passes away. But given my brother and I pay a much higher percentage in federal and state taxes than her, is there any merit to educating her on Roth IRA conversions? We both intend to be working and therefore in these brackets for at least the next 10 years. I’m not sure what, long term (say 10-20 years) would be better in terms of limiting taxes to the family estate. I think she should try to convert at least 50% of that IRA to a Roth IRA and use the taxable account to pay for the conversions. It would advise to convert up to the amount that’ll get her into the max dollar amount in the 24% bracket. Again, due to expenses, I don’t think she can get herself into the 12% bracket. Is that a better idea than just leaving everything alone since we’ll get the step-up eventually? Or convert so my brother and I can stretch out the Roth IRA and pay no taxes on the money? Should she prioritize spending down taxable or IRA? Oh, also the taxable account is $1.1m of STOCKS, not mutual funds. I think a high plurality of it is with AT&T so she gets very decent dividends in that which are currently reinvested. It’s with Merrill Lynch, which I’m also not happy about but I’m trying to pick and choose advice. I have no idea what the fees are but I’m sure I could decrease them by at least 50% if I actually controlled it.

    I also know spend taxable before tax-deferred but she really is against spending in the taxable account, unless for a very good reason, because in her view it belongs to my brother and I, even though we can’t have it b/c even with steady jobs and advanced degrees, our ages dictate we’re immature people who’ll blow the money on cars, cocaine, and hookers 🙂 I’m alternatively asking her to just sell a bunch in the taxable and put it into 529s for my kids so she can at least know it’s going for education and it’s going to her innocent small grandchildren rather than her grown kids

    #151720 Reply
    Avatar ITEngineer 
    Participant
    Status: Other Professional
    Posts: 301
    Joined: 05/09/2017

    You keep on referencing expenses when talking about tax brackets. Do you mean income? You could have $1M in expenses, but be in the lowest tax bracket due to minimal income and drawing down savings to pay for said expenses. The 24% tax bracket means she has more than $82k/year in income. If most of her income is dividends, the tax on qualified dividends is 15% above that.

    Things I would be concerned about:

    1. A proper will that is updated. Who’s getting what? Now that there is a second house, do you get one (to sell) and your sibling the other? Or are you both 1/2 owners? Did she update her own will after her mother passed and she inherited those assets? If

    2. The idea that you aren’t responsible enough to take control of the money. Would she start gifting you $15k/year from the taxable account?

    3. Heavy weight on individual stocks in the Taxable account. (Full Disclosure: I own a lot of individual stocks) – Depending on what stocks and what happens, this account could lost a lot of value. Or increase a lot in value! It goes both ways.

    4. How much money is in the IRA? That’s a huge range $1M-$1.5M. If $1.5M the RMD would be ~$57k for age 71. If only $1M, it’s ~$37k for age 71. That gives you a lot more headway for ROTH Conversions.

    5. Is she taking RMD on her IRA? If not – she needs to or else faces further IRS Penalties.

    I like the idea of a Roth conversion, but I think it might not be worth the emotional energy. Like you have already stated, if she can’t sell the second house and thinks you are too young, it will be hard for her to take financial advice from you. My best advice is to make sure her financial house is in order (will, trusts, etc) so when she eventually passes, you know what assets you will be inheriting ahead of time.

    #151796 Reply
    Avatar Larry Ragman 
    Participant
    Status: Other Professional
    Posts: 489
    Joined: 08/30/2018

    1. Recent experience sorting out of an estate suggests for me that she should sell the two homes. Ideally place the funds in the RLT. But that way she converts the houses to monetary assets to alleviate her fears of running out. This simultaneously improves the transition of the estate by keeping houses/ funds out of probate.

    2. In parallel, find and move into a nice independent living place with option of transition to assisted living later.

    3. She can keep control and still help with the kids education by gifting funds to 529s each year. One important conversation then is if she will track what has come out of your half for the kids to be fair to your brother. (Of course, she might just say it has nothing to do with you two and just be about the grandkids plus any others that come along.)

    4. Does she have a professional planner and estate attorney to speak with? Could help with the conversation.

    #151815 Reply
    Avatar JBME 
    Participant
    Status: Spouse
    Posts: 409
    Joined: 03/26/2018
    You keep on referencing expenses when talking about tax brackets. Do you mean income? You could have $1M in expenses, but be in the lowest tax bracket due to minimal income and drawing down savings to pay for said expenses. The 24% tax bracket means she has more than $82k/year in income. If most of her income is dividends, the tax on qualified dividends is 15% above that.

    Click to expand…

    By “income” I mean her SS + RMD from the IRA. And given her expenses, she’s going to have to take more than her RMD from the IRA, which is fine. My best estimate is she gets $9k in SS, ~$20k from dividends from the taxable account (which is reinvested but I told her she should shut the drips off), and the rest is from the RMD.

    She won’t gift us $15k because she’s worried she’ll run out of money (that’s the irrational fear…she’d have to make a ton of mistakes in order to run out of money)

    I’m hoping she’ll entertain converting ~$100k / yr for at least 5 years to Roth. Unfortunately I think I’m going to have to convince her financial planner to do this, and the financial planner could have a monetary interest to not do this.

    She also won’t sell the two houses anytime soon. Emotional attachment is the issue, and yet she’s worried about running out of money and won’t liquidate the houses to give herself more money (I estimate the value of the two homes together is greater than $1m). The second house sits empty, except for all of my grandmother’s personal belongings which still fill up the house and haven’t been dealt with 4 years later. Her mother insisted she live in her house until the end. My grandmother had dementia for 10 years, from age 80 to age 90 when she passed, and refused to move out of the house. I sadly expect that wrong-headed stubbornness is going to be the same thing my mother, so no independent living. The big difference is my mother lived 1 mile away from her mother for all of those years. My brother and I live over 1000 miles away. I’d be happy if just one house went away (ideally both but I think that’s pie-in-the-sky thinking at this point)

    She also doesn’t want to pay capital gains on anything because paying taxes is bad. So I guess we’ll lose even more to taxes eventually. She does have a RLT but I’ve read it and although it was filled out in 2017 it doesn’t reflect the new tax and estate changes.

    I suppose I can put it in her mind to look into Roth conversions but I shouldn’t hold my breath.

    #151830 Reply
    Avatar ITEngineer 
    Participant
    Status: Other Professional
    Posts: 301
    Joined: 05/09/2017
    She also doesn’t want to pay capital gains on anything because paying taxes is bad. So I guess we’ll lose even more to taxes eventually. She does have a RLT but I’ve read it and although it was filled out in 2017 it doesn’t reflect the new tax and estate changes.

    Click to expand…

    Good luck. I agree with all your concerns. She could pass 20 years from now (which is reasonable if her mom lived into her 90’s) and you inherit two run down houses that haven’t been maintained, taxable account (where that would stand, who knows) and a number of other headaches.

    I think it would be reasonable to assume for your own financial planning purposes that you might not see anything from this estate. And it will bring many headaches to you in the future. I hope your sibling and you are close and can work through the challenges this estate faces. Best of luck to you.

    #151833 Reply
    Liked by MPMD, JBME
    Avatar JBME 
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    Joined: 03/26/2018

    thanks! my brother is a lawyer (but not an estate one) and we’re not super close but see each other once a year or so and are of very similar socioeconomic means, which suggests to me that we will be able to tackle the challenges fairly evenly. I’m expecting $0 from all of this, but I was greatly hoping at least for a decent chunk to pay for my kids, and my brother’s kids if he has them, college experience. My mother had several health issues in her 60s, including hip replacement surgeries (yes, plural, on both hips), and more troublingly, heart valve replacement surgery. I don’t think she’ll make it to 90….her dad died at 69. So I’m just going with the difference and estimating 10-20 years but probably’ll end up closer to 10.

     

    It’s just so frustrating to be reasonably educated on these issues and not be able to help because of ageism. In this case, just because I’m in my 30s I don’t know how to handle money even if I’m on a website such as this, read finance books, etc while my mom won’t listen or plan so that the money comes to who she says it should go to rather than the tax man.  At this point I’ll just hope and pray and try as gently as possible to persuade to at least take from the taxable and gift it to several 529 accounts with her as the owner (I’d love to have her just put it in already-existing 529 accounts I have for the kids, but then she loses her power over the money since I’m the account owner). I’d then have to hope and pray she doesn’t have a freakout moment and decide she needs the money in the 529s and take it out and incur a 10% penalty.

    Interestingly last night I was thinking up this post and WCI posts on the blog today stories about trying to handle aging parents’s estates

    #151839 Reply
    Liked by ITEngineer
    Craigy Craigy 
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    The $1.1m in her taxable account she says is what my grandmother wanted my brother and I to inherit, so she’s generally against spending in it. When asked why she inherited the money (which is now in a revocable trust) instead of my brother and I, who were in our early 30s when our grandmother passed, we were told we were “too young” to inherit such money. Yet she’s financially inept but whatever I guess.

    Click to expand…

    What did grandma’s last will and testament say?   😉

    Yeah the $1-1.5M of IRA money isn’t really $1-1.5M, it’s a little more than half that since it’s all pretax.  As you said, it’s going to cost her money to convert it.

    So we’re looking at about a $3-4M estate?  $1.1 taxable brokerage, $1-1.5M IRA, $30k Roth, $1M+ personal residences?  The taxable account and homes should get a step-up in basis at her death.  The IRA is an income tax bomb.

    Frankly, even at 71, I don’t blame her for being hesitant to let you burn down her brokerage account in order to convert that IRA.  In her mind she’s only got about $2M of cash, two big monthly costs in those homes, and the cost to convert any meaningful amount of the IRAs would substantially reduce her available liquid assets.  The tax problem of the IRA isn’t her problem, it’s your problem.

    I would encourage her to take bigger distributions and spend down the IRA in general.  Unless she’s a spendthrift of course.  One way to convert a pre-tax IRA to a post-tax asset it is to simply take the distributions and pay tax on them.  Ideally they’d be converted into Roth but a regular brokerage account is the next best thing as far as inheritance goes.

    The obvious bonus here is to sell the extra house, but it seems like that’s out of the question for now.

    LEVEL 1 WCI FORUM MEMBER.

    #151866 Reply
    Avatar AlexxT 
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    Status: Physician
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    Joined: 01/13/2016

    I respectfully suggest that you just leave her alone.  The amount of money at stake isn’t worth getting upset over.

    It’s her money.  It’s her houses.

    She gets sentimental pleasure over owning her houses.  It’s how she honors her memories.  She is clearly getting enough pleasure from owning them to be worth the expenses.

    If the IRA is worth $1 million, and her marginal tax rate is 24%, while yours is 45%, then perhaps you’re looking at a 20% loss, assuming that you can convert the entire IRA before she dies, so a total of 100k for each sibling, maybe $150 k if the IRA is worth $1.5 million.   So what?  Fortunately, you all have enough money so as to make it unimportant in the long run.  Just be grateful that you’re worried about paying taxes, and not about how you’re going to support her.

    I also think that she’s right to worry about running out of money.  She’s in good health now, but so is everybody, right up until they aren’t.  That money might end up being needed for  a skilled nursing facility.

    I would just encourage her to spend down the IRAs first.

    It could be worse. She could be giving the money to some Nigerian prince, or some faith healer on TV, or gambling it away.

    Perhaps I wouldn’t be as sanguine if it were my mother, but that doesn’t make the advice less apt.

    #151915 Reply
    Liked by Hank, JBME, Anne
    Avatar Anne 
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    Status: Physician
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    Joined: 11/07/2017

    I agree with AlexxT.  I do not think her fear of running out of money is irrational.  Her own mother had dementia for 10 years, and it sounds like she was very close to her (possibly helping with caregiving?) so she knows what that looks like.  She may need all that money in the future.  I would change the focus from setting up the estate to what will be most advantageous to you and your sibling when she passes, to what will be most advantageous to her over the next x number of years, where you have no idea what x is.

    #151927 Reply
    Liked by q-school, JBME
    Avatar JBME 
    Participant
    Status: Spouse
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    Joined: 03/26/2018
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    I greatly appreciate all of these perspectives, including those that suggest let sleeping dogs lie. I will just repeat to her to spend down IRA first and if she’s really insistent that the taxable account isn’t for her, let see where we’re at once the IRA is gone.

    The taxable is just a complete mystery because my grandmother passed in 2014 and was only made aware of the existence of this taxable account in January 2018, under sketchy circumstances (a legal matter). So if it was truly left for my brother and I, we certainly weren’t told within a reasonable amount of time, and unfortunately I never saw the last will and testament, so I’ll never know the real truth since I’m not inclined to believe what I’m told, only what I can read.

    #151939 Reply
    Liked by AlexxT
    Avatar Larry Ragman 
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    The probated will is a matter of public record. Just go  office of the county registrar of wills to get a copy. If your grandmother set up the trust rather than having it formed by the will, then it is privately held, so you will have to have your mom or her attorney show you.

     

    #151965 Reply
    Liked by Craigy, ITEngineer
    Avatar Larry Ragman 
    Participant
    Status: Other Professional
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    Joined: 08/30/2018

    I agree with AlexxT.  I do not think her fear of running out of money is irrational.  Her own mother had dementia for 10 years, and it sounds like she was very close to her (possibly helping with caregiving?) so she knows what that looks like.  She may need all that money in the future.  I would change the focus from setting up the estate to what will be most advantageous to you and your sibling when she passes, to what will be most advantageous to her over the next x number of years, where you have no idea what x is.

    Click to expand…

    Right, so it is not a good idea to let her waste the money on two houses. That will neither be good for her financially in her dotage nor the kids’ inheritance. It remains her decision, but at least you can have a serious conversation with her about your concerns.

    #151967 Reply

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