Be Intentional About the Future
/Lately I’ve encountered estate plans posing issues regarding taxes. When written, perhaps they were not issues. But as years pass, assets grow, tax situations change, or a year with investment sales that create losses to carry over for years. All of which could result in higher or unnecessary taxes.
Two misconceptions are a decedent’s carryover capital losses may be used on an estate income tax return, or transferred to the surviving spouse, including those in a joint account. If the taxpayer is in failing health, he or she should consider ways to generate gains to offset any capital loss carryovers. If death was unexpected, the spouse may use the remainder of the tax year to generate gains to utilize the losses on the final joint tax return.
In addition, naming beneficiaries needs tax consideration based on the type of income and the beneficiary tax situation if known. Traditional IRA distributions are taxable, generally Roth IRA distributions are not, and taxable accounts receive a step-up in basis. If your beneficiaries consist of a mix, such as high-income wage earners, low-income wage earners, and charities, your directives should be cognizant of the most tax beneficial arrangement for each heir. Perhaps these assets should be allocated to more than one IRA, Roth, or taxable account to distribute more tax efficiently. Consider each type of income for the beneficiary:
• IRA: Inherited IRA distributions will be taxed to the individual beneficiary as ordinary income and favor lower income taxpayers or charities.
• Roth: Inherited Roth accounts, including earnings on the account, will not be taxed if the decedent made the first contribution and owned the account for five years. Otherwise, earnings are taxed. This is because the decedent already paid the tax on the after-tax contributions and conversions.
• Taxable investment accounts: Heirs receive a step-up in basis to the fair market value as of the decedent’s date of death. If investments are sold immediately, there is likely no substantial gains/losses.
• Qualified charities are not taxed for any of the above.
Thoughtful planning and regular review of distribution of assets may result in substantial tax savings for your heirs.
- Pam Smitson, CPA, CGMA, Smitson Erhart-Graves Financial Advisors
