Inheritance Distributions

[sjc328]

Unfortunately, I suffered the loss of both parents (Ages 62 and 60) and my great Uncle (Age 84) within a three month period last year. Being an only child, this tragedy has left me in a position to inherit a very large sum of money (sole beneficiary and primary beneficiary respectively) and I am trying to best strategize to mitigate the tax implications to me. After Federal and State inheritance taxes are paid, My parent's estate is roughly 230K plus an additional 441K in an IRA. After similar taxes are paid on my Uncle's estate, there is about 2m from his estate (no IRA). My concern is that I will get hit with a massive income tax bill once funds are transferred to me. I think I can spread the value of my parent's IRA out over my lifetime per the Pension Protection Act of 2006 (and I believe can also skip 2009 RMD's with recent legislation). I'm looking for ways to stretch the other distributions to avoid the 35% tax bracket if possible (about 373+K income for 2009). My job income is roughly 85K per year. I would appreciate any thoughts that this community may have. Thank you in advance....

[Seeker]

Unfortunately, I suffered the loss of both parents (Ages 62 and 60) and my great Uncle (Age 84) within a three month period last year. Being an only child, this tragedy has left me in a position to inherit a very large sum of money (sole beneficiary and primary beneficiary respectively) and I am trying to best strategize to mitigate the tax implications to me. After Federal and State inheritance taxes are paid, My parent's estate is roughly 230K plus an additional 441K in an IRA. After similar taxes are paid on my Uncle's estate, there is about 2m from his estate (no IRA). My concern is that I will get hit with a massive income tax bill once funds are transferred to me. I think I can spread the value of my parent's IRA out over my lifetime per the Pension Protection Act of 2006 (and I believe can also skip 2009 RMD's with recent legislation). I'm looking for ways to stretch the other distributions to avoid the 35% tax bracket if possible (about 373+K income for 2009). My job income is roughly 85K per year. I would appreciate any thoughts that this community may have. Thank you in advance....

Have you spoken with anyone about the above?

Generally there's an "estate tax" at the Federal level.... there's no "inheritance tax" at the Federal level.

Inheritance Tax vs. Estate Tax, Inheritance Tax Exemptions

I think there's also some $2 million deduction or exemption for estate taxes provided for at the Federal level -- but I do not know the criteria. You may want to look into exepmtions or deductions for Federal estate taxes due or not due.

Also usually the executor takes care of this from estate fund's before anything is transferred to the heir(s). Make sure you get and read all the documents and know what has been done beforehand.

[gamecock43]

I am sorry about your loss. I hope you have a strong team to support you during this time.
I lost my parent about 5 years ago and inherited about 1mil. Its a lengthy and difficult process.
I wish I could offer you the help you are looking for, but I was such a $ newbie at the time that I really just trusted my parents long time financial adviser and my father- in -law to handle everything. They really just provided info as I asked for it, and helped me choose options. And now, years later- I can barely remember the details of it all. It's such a blur for me. I was to overwhelmed with so many responsibilities that it's hard for me to remember details.
About a year ago I wrote a blog about things I learned during the process. I don't know if what I went through is the same or even similar to what other people go through, but I am providing a link to the blog in case you want to look at it. my dirty dirty secret...: Gamecock's Mind over Money
Once again, I am sorry and hope you have a good support system. It's amazing the amount of details and the education you are thrust into during this time. But my experience really took me down a few paths I never would have ordinarily gone down (some bad, some good), so it is a life changing event. I hope someone is able to come along to answer your specific questions.

[MonkeyMama]

I too am sorry for your loss.

I think first and foremost you need a trusted financial advisor (& tax advisor as well). The two usually do not mix. & it doesn't hurt to have more than one opinion (I cringe at some of the things financial advisors advise their clients in their own personal interest, at times. Likewise, you wouldn't go for a tax advisor as your only source of financial advice).

I know there are a lot of DIY-ers on this board, but it is one thing to ease into things as you slowly accumulate wealth. Coming into money is a whole other animal. You need a trusted advisor (did your uncle have any?) while you take time to learn, grieve, and sort things out.

You will find there is not a lot of tax breaks for the middle class in the income range you describe. There is always maxing out retirement (& other tax-deferred) vehicles, giving to charity, buying real estate (to an extent), gifting money, and setting up trusts for future beneficiaries. Nothing I listed really amounts to much, except for future planning if you intend to preserve your wealth for future generations.

Being married is a good tax strategy (today) but not much of a money saving strategy overall.

You will find that investments do have favorable tax treatment. A lot of it will be taxed at lower dividend and capital gain rates. I don't think you have any chance in heck of avoiding the top tax rates though - sorry to say. But it's not like all your investment income will be taxed highly - that is the good news.

(P.S. I assume OP referred to annual income generated by the $2 mil+ assets he will now own. & OP seems aware of benefits of delaying IRA distributions, which would be taxed at higher rates).

[sjc328]

I wanted to thank you all for the responses... Some further information regarding what was brought up. The numbers that I put forth were after the Federal and State taxes were applied (My Uncle was domociled in NJ, which has one of the stiffest taxes on inheritance). I have spoken with my advisor and will likely get a CPA involved shortly. I was the Executor of both estates which was overwhelming to say the least, but I made some attorneys earn their money and tried to educate myself along the way about the myriad of rules. I am just at the final stages now of the distribution part and wanted some outside views apart from anyone who would potentially have a stake in this...

Gamecock43: I read your blog entry... "Wow" is all I can say in there were so many similarities to my own situation. I've never been a person to show my emotion on my sleeve and I'm deathly afraid of how friends and coworkers will perceive me following this mess. Thank you for the link...

[EEinNJ]

You should have an attorney and tax advisor help you with the estates. Taxes are paid by the estate, not by you, the inheritor, so don't worry. There may be some rules about the IRA distributions, but generally they should just become IRA accounts in your name, and you pay taxes as ordinary income when you take distributions.

When you get all that settled, and you have some time and perspective, then you can begin to think about how to best use the money to serve your life and goals.