Family Funds
July 08, 2018 5:00 AM
by Brittany N. Cox
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By Brittany N. Cox, Registered Investment Advisor at Nestlerode & Loy Investment Advisors

Many people spend time worrying about what will happen to their money when they pass on and the money moves to their heirs. Should it be in a trust, go through probate in the estate, or something else? Should I name all my kids as beneficiaries on my retirement accounts? Should I move the money to them as gifts before I die?

There are many options and each family should look at their situation individually to make sure they are doing what is best for them and their situation. I want to discuss a few of the options available to help make the conversation with your advisor, accountant or attorney a little easier.

One option for gifting or transferring money is to give individual stocks to your heirs. Individuals who may be holding on to appreciated holdings such as stocks could “gift” those assets to their younger heirs whether it be niece, nephew, son, daughter or grandchild. For example, in 2018, each parent could gift up to $15,000 each to their child. The tax imposed on the transfer of assets will depend on the receiving heir’s income. However, “kiddie tax” places a tax burden on individuals under the age of 19 or full-time students under age 24. Earnings more than $2,100 will be taxed at the rates that apply to trusts and estates ranging from 10 percent to 37 percent.

An additional option is to start funding the heir’s retirement, if they have earned income. For young adults with low earned income, a Roth IRA makes sense in most cases since they are paying low to no tax on their earnings now and the funds will be tax-free in retirement when they will presumably be in a higher tax bracket. Roth IRA’s grow tax-free as well so there will be no annual tax burden for the heirs. Also note the Saver’s Credit may be available in this situation. The Saver’s Credit reduces the income of an individual based on their earned income and the amount contributed to a retirement account. Once the heir holds the Roth IRA for 5 years, tax free withdrawals can be made up to the amount of your contributions, but there will be tax on the earnings when the owner is under age 59½.

You should also take into consideration who gets which accounts and assets. Often it makes the most sense to leave tax-deferred retirement accounts to your younger heirs since, as mentioned above, they will have to take an RMD and the younger heirs will most likely have a lower tax bracket and a longer time period lowering the amount of the withdrawal they are required to take. As mentioned, when you gift appreciated stock while living, it should go to younger heirs in lower tax brackets since your cost basis will be passed along. The opposite is true when the appreciated assets pass to your heirs after your death. The inherited stock will be valued based on the date of death of the owner. Your heir will pay capital gains tax based on that calculation on the date of death, not your original cost basis. This is commonly referred to as the “step up basis.”

A trust account is another way to allocate your funds. There are different kinds of trusts which have different purposes. It is important to review your own individual situation to be sure a trust account is right for you. Generally, a trust is an arrangement for holding someone’s assets while they are managed by someone else (the trustee) on behalf of the beneficiaries. The trustee is held to the fiduciary standard, meaning they must act in the best interest of the beneficiaries.

Think of a trust such as your escrow account. You set up this trust to have the trustee distributes to the trust’s beneficiaries in the same way the bank would pay your property taxes and home insurance from escrow. Trusts can often be useful in estate planning. A living trust goes into effect while the creator is still living, and it usually gets to bypass the probate process. There are also revocable and irrevocable trusts which determine if the trust can be canceled or changed.

When considering end-of-life decisions, it can be a comfort to know not only that you can assist your heirs financially, but that you are going about it in the right way. For more information and to learn what may be best suited to your situation, consult with your financial advisor and/or your attorney.

Nothing contained in this article should be interpreted as a promise or guarantee of earnings or investment results nor a recommendation for the purchase or sale of any security or sector.


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