¶ Inheriting Money
Welcome to a Wiser Retirement Podcast . Before we get started with the episode , i want to tell you about a new e-book available on our website called Buyer Beware . Why do they keep trying to sell you that annuity ? This e-book covers the various types of annuities , negatives to owning annuities and better investment alternatives to annuities .
To download this e-book , you can click the link in the episode notes or go to wisere investorcom and you'll find it at the bottom of the page . Now on to today's episode .
Welcome to a Wiser Retirement Podcast . We believe the best financial advice should always be conflict free . I'm your host , casey Smith , guiding you to financial freedom today , my co-host , missy Beach and McKayla Laney Hey , casey , i can see that really fast . Yeah , how are you guys doing ?
Great , how are you ?
You're back for episode two together .
Yeah , this is three .
Oh , this is the third time we've done this .
Yes , that's a third time .
You're cool 171 .
So you know .
I kind of forget about these after awhile .
Everyone probably knows us , but Missy is a senior financial planner with us . Kayla is a planning associate with us And they do a bulk , if not almost all , the financial planning that comes to Wiser . Right now , if you guys are kicking it , we've got backup coming . We have William .
Waiting in the wings .
Waiting in the wings , all right . So today we're going to talk about I've inherited money . Now what ? So ? we have to start with the first thing that any client asks us when they come in and they inherited money , which is how much tax do I have to pay ?
Yeah .
So , missy , why don't you break that down for us ?
Okay . Well , when you inherit money , the good thing is inheritance taxes don't apply to you , the beneficiary of the inheritance , unless you're in some obscure state outside of the Southeast that does impose an inheritance tax .
So no tax paid by the person inheriting assets .
Now , as far as the estate paying tax , federal tax- well , if your estate is worth , you know 24 , 25 million for a married couple , then the estate might owe tax , but the estate tax rate is actually going to come down in 2025 to maybe 6 million or so per person . So then we're down to the $12 million per couple taxable estate .
So still , you know it's up there . You know we might have some clients running into that , but not for the general population Is that ever really an issue . So for our clients coming in saying to us , hey , i just inherited , you know , a couple hundred thousand for my great-aunt or for my grandmother or for my dad , not a problem with estate taxes .
So not a problem because there is no tax . But I'll add one caveat to that annuities . I hate annuities , but they are the worst things to inherit .
Yes , they are , because you're always going to have a gain , you know , above the cost basis of the annuity . You just can't get around that . It's not like a regular brokerage account that we get a step up in basis when the owner dies .
So let's explain that . So if I pass away and I leave my children a brokerage account , not a 401k , not an IRA brokerage account , and I paid $10 for Apple stock I was a genius Now it's worth $300 a share , right , the $290 gain goes away .
You could . your kids could then sell it today for $300 a share . pay no gain , Correct , Just pocket that $300 .
If it goes to $400 after the date that I died it was $300 , then it goes to $400 , they'd only pay the gain on the $100 , not the $10 that I paid for it . You have a step up in basis .
that's correct , which is why in older client accounts who have individual stocks , we don't really try to liquidate those If we don't need to , because we know statistically statistically , we should be able to pass those to the next generation with with no tax issues .
Now , if you inherit an annuity , you don't have that protection , and so what happens is you have to pay income tax , not capital gains tax real tax but real tax on the gains in the annuity . In the meantime , the person who bought it , who've left you this annuity was told they were the very most tax efficient vehicle ever . Uh , and they were lied to .
Yeah .
So again , stay away from annuities . Um and another . another way that tax income tax could come in is inherited IRAs .
Yeah , Uh , i mean , if you're a spouse , you can take over that IRA into your own IRA No tax issues , no tax issues and , um , you know , take it out over your lifetime , um . But if you're a non-spouse , you know , say , you inherit the IRA from your mom or dad when he or she passes . Here's the bad news . Now you have to empty that IRA over 10 years .
So if it's a big IRA balance like we're seeing these days a million dollar IRA over 10 years , it's adding a hundred thousand dollars of taxable income Plus the growth Plus the growth . Yeah , so an IRA is not a great asset to pass on , but there's not much you can do about it right now .
Yeah , It just is what it is , unless you're doing Roth conversions during your lifetime to try to , you know , whittle it down and get it out at a lower tax rates and what your kids are in , and but it just kind of is what it is . It's life , that's where it comes down to legacy planning .
If your kids are super successful , making either in the 37% bracket and you're still in the 22 , it might still make sense for you to convert at the 22% rate because their income tax is going to be it'll be tax higher , so the money lasts longer , the family gets more money .
But if you're in the 22 , or you're in the 12% bracket , your kids are in the 12% bracket , or they're in the 22 and you're in the 22 , it doesn't it ? just to me it doesn't make a whole lot of sense to accelerate that unless it's just truly , you know , excess funds . Yeah , so it takes a lot of planning .
There's no way we can give advice to the masses on how to make it And how to handle that situation by situation . And then obviously sometimes we see um you know a scenario where one child is in the 37% bracket and the other one's being supported by everyone else in the family .
So so then you have you know , that's where you have to get into more , doing some trust work . Um exactly .
You know , I've even had one client couple in the past who were in a low tax bracket , like 22% , and both kids were in the 37 , well , 39.6 at that time the highest tax bracket .
And so what they did is they would gift the parents up to the annual exclusion every year to help the parents with the Roth conversion , knowing that they were ultimately going to inherit the IRAs , so they wanted to just pay the tax burden .
At their rate .
At the parents tax rate , knowing they were going to get the IRAs one day . but they wanted the tax at the parents tax rate . The parents didn't need that the money out of the RMDs anyway , so it didn't matter , It was just extra . So the kids facilitated the Roth conversions through annual gifting and it all worked down .
That's good . It's a great strategy . So again , that's an individualized strategy .
It's hard to figure this out for the masses , but it really is .
So if we understand now , like the tax implications right After that you've inherited , let's assume it's essentially cash or it's very liquid . What do you do now ?
I think the biggest thing is you steward it well . I think it's one of those things where it can be very easy to be like , oh , i got all this money , i'm rich now , or whatever it is that you may think , and I think that's .
but it's also a really hard time as well , because you're having to grieve the loss of a loved one , and that can jade our vision in so many areas of life .
And we know that the things that people are not necessarily the most rational about our money and the people that we love , and you know the grieving process is not a rational process at all , and so having all of those co-mingle together during that time can be a very high anxiety point for families .
And so it's really sitting down and figuring out the best avenue for yourself . So , like you had mentioned earlier paying off the mortgage , if you have a large mortgage or something like that to putting your money or the money that you've been gifted to good use . that's going to be the best for the overall financial picture .
and just really analyzing yourself and making sure it's not necessarily oh , let's go on that $20,000 vacation to Europe .
It's no , because at the end of the day , an inheritance can make you rich for a year , or it can make you wealthy for a lifetime , and it's really all about how you're going to choose to Steward it and if you're gonna steward it well and you're gonna use it as a loving legacy and a blessing that they've gifted you or you're gonna use it as a You know ,
ooh , let me get out of jail free card and let me go live life lavish for a year .
And so it's really down to those principles and how you choose to make that decision about the family a few years ago that the daughter was working really hard on Managing that inheritance well , and She she mentioned other family members that might want to come see us . And then she says but my brother won't .
¶ Managing Inheritance for Financial Success
And I said , what do you mean ? He's ? he booked private jets almost everywhere . They went on vacation for about three years . Now that money's all gone . Yeah choices Yeah it was . It was a decent sum of money , so I could see why he probably had a false sense of security . But then eventually you just run years later You're not dollars .
Yeah well , it's like you're the winning , the lottery people that you hear that like they win the lottery , they have multiple of multiple of millions and then it's like 90% 90% end up in bankruptcy . I don't know where that starts .
I don't know , that's everyone who wins a lottery , because you know you could win the 10,000 lottery and still .
I don't know .
They tell me that stat or not , but I know the big ones . When there was a whole TV show about it , i never watched it , but there's a whole TV show about that . Would they be ?
fascinating Yeah yeah . Psychology behind it . But I think , michaela , you brought up a big point in that . You know , in Inheritance is not something that we plan for at wiser .
You know , a lot of times clients will say , oh , and I Forgot to tell you , you know , there'll be an inheritance one day , and we always say , oh well , that is great , thanks for letting us know . But we always plan on just known facts And so we'll have that out there as a maybe .
But you know , your grandmother I always joke , you know might go to the casino and put it all on red and it's gone Or she might be in the nursing home for the next 10 years and totally bleed it down . So while there's good intentions , that you think you might get this money , who knows what happens over the next decade or two ?
and While it seems like you know you're going to get an inheritance , who knows ? so we don't even put a placeholder in the plan , really for it .
Yeah and that's the right way to do it , because it's not guaranteed unless it's sitting in a trust .
Yeah , separate from their assets .
I think that's only to my favorite candidate . Any plan that I've touched was the money had already been segregated . It's just doesn't transfer to them until their death .
Yeah , and another thing about an inheritance is that a lot of people are reluctant to move it out of the Actual form that they got it in . So say , their grandmother left them half a million dollars in coke shares .
They feel really emotionally tied to coke shares because granny bought them back in the 50s and Sometimes it's really hard to explain to them like this is a wonderful gift from your grandmother . You have to look at it in the big picture terms , not the fact that it's half a million of coke shares . Take coke out of the picture .
Think about the legacy and not the format , because that's usually all the client may have , or it's the bulk of their net worth , and this is the prime time to diversify and Spread out your risk from just that one single company , because the basis got stepped up at granny's death right so now we can put them into a diversified portfolio and spread out that risk
. And so I feel like a lot of times I'm trying to beg clients and Show them the value of it's her legacy , not sure with that ?
with a step of a basis . Yeah , Yeah they're very true you know we have a whole series that we did on legacy planning And I think it was Mr Hughes . You wrote a book . Can't really tell the book but you can search for our and that in our archives on our Planning or we can link to that in our show notes .
With that it's telling a story and You know , if in your example Grannie had done a great job of saying , hey , i bought these years is why I bought those that they appreciated , coke in her time is very different than coke in our time , right , and so you understand the legacy in the story behind it .
There's ways to modernize that portfolio to to be what you know It should be for today and building for the future .
Well , it's also like individual stocks . A lot of times , when They were investing in them was like the way to that was the only true , there was no TFs .
There were no mutual funds prior to what 1980 Yeah exactly very few compared to that for however long , then it's .
That was the best option at that time , and they've held it and held on to it , and now there's a better option .
You're right , i'm sure granny would have chosen ETFs , given the opportunity .
Specifically the S&P 500 .
It's a one individual stock , but yes .
Yeah . So I think that that's an important thing is you have , you have a reset and you know it's um , it's , it's , it's , it's thinking okay , what do I want to do with that ? And it's amazing . I think we've had more families recently at least the ones that I've been working with that have been focused on .
okay , i inherited this , i want to be a good steward , but I'm never going to touch it . It's just going to go on to the next generation , which is which is very interesting . I haven't seen that as much in the past , but that's really how you pass on um generational wealth , um , but again that that goes back into more of a legacy conversation .
I want to focus today more on the people who are receiving it in inheritance . Um , but I did . I do think it's a great opportunity to write the ship .
Yes .
You know , i what I hate seeing is the on the smaller inheritances let's say less than 500,000 , then they pay off debts , maybe pay down or off a house , but then you meet with them two , three years later and they're right back into the debt again . Um . So you have to make sure you have to understand you . You really have to look from the outside .
So for me , as an advisor looking from the outside , sometimes I tried to hide the money from them and they don't even realize it . I like that . But , I'll say let's pay off the house and then you can work . You take that money that was your paying toward the mortgage and then you can pay off your credit card debts with that .
That way your mom or your dad Payed off your home , and that's how you can think about it , because it's a lot harder to go get a HELOC when you're making bad money choices . Right , exactly . And get that money back out The bank will see that too and go yeah , no , we're not going to keep that one Um .
So you try to hide it from from them and and , at the same time , you know it's investing in real estate . It wasn't spent , it was invested in real estate , um .
But obviously , if you think that you can change your lifestyle , then paying off the credit card debts , the car , um , and then creating emergency funds , doing the all the normal steps that we talk about , right Um , limiting debt , having emergency fund , save enough for retirement , get debt paid off prior prior to , uh , retirement , meaning the house , right Um ,
college . Yeah , good , lump sum into the five 29s Right And then and then the balance can go into what we call opportunity money , which is our favorite money to manage , because that may not be in stocks and bonds Long-term . It may be transitioned into a second home or a third home or um , whatever it is .
That's why we call it the opportunity fund , Right , Uh , but ultimately I think that you've got to look at the total picture and figure out what's the maximum impact to do with inheritance .
Definitely .
Yeah , i really think , um , paying down the mortgage or paying off the mortgage is a really good one , because that helps clients see that gift from the family member that left it for them . I mean , that's a really tangible thing to do with it .
Right .
And I love what you said . Like it . It's really a challenge to go get a HELOC now to start pulling the money back out . So they'd have to jump through some pretty big hoops to , you know , start borrowing against the house again . So that does lock up that asset and keep that preserved for them .
Right , um , but yeah , it's , it's . it's an individual , uh , case by case basis . Um , we can just tell you what I think most questions are . Which is it relates to ? is this taxable ?
and then , how should I best ?
use this Um , but I agree with the cladded judgment part . A lot of people say , well , they might do doing this with it , and then you're looking at the situation going . That's crazy . Why would you , you know , why would you do that ?
Um back , you know , let's back it up and let's go through these steps to figure out how to make sure you guys are in the best position going forward .
Yeah , Um , i would say , uh , i would say the number one question we get asked is should I buy a rental property ? Oh do you want to be ?
a landlord And they're like no , No .
¶ Inheritance, Wealth, and Legacy Planning
I'm like , even if you're dealing with a real estate management company , no , that's just no healthy longterm asset classes .
Well , i I agree with that . You have to have some liquidity , but I do like the idea of having vacation property that is also inside a rental program . I'm still pro that .
Oh yeah , if it's , but you have to have a .
You don't want to be the sun lord . That doesn't exist anymore . By the way . Um , there are some flips that people get because they have real estate agents looking for them , but that , just that world doesn't exist right now in a profitable manner .
Um , but again , before you have a real estate property like that , there are risk and carrying that , so you have to make sure that everything else is on track for sure , but you think about that . You take an inheritance .
You eliminate most of your debt , you now have more free cash flow , which you then max out a 401k plan , you max out deferred comp that's available to you , you put more money in for your future self , you've accelerated the savings rate , so theoretically you should be better off , and then your next generation should be that much better off .
Because that it doesn't end up that way , though It gets , it disappears . Because why is that ? is because value systems are not passed down to the next generation on how to handle wealth and and how , how to think about legacy in the future .
So that goes back to this new concept of like a love letter or a legacy letter . That a lot of people are starting to do along with their wills . That tells the beneficiary how you want them to live their life and how this money should help them or guide them , and what the family principles are , how they should use it in their legacy and carry on .
So that's something for people to consider . Instead of just giving out all this money upon your passing , feel free to write a personal letter and include it to your beneficiaries and let them know how you feel about how they should live their lives and what they should do to be a good steward of your money .
I think it's also so important to have that letter , especially if you have and you know you're passing down to siblings that don't come from the same financial background .
As far as you know , you have the one child that's uber successful , has a great financial picture and great financial stability , and you have another that doesn't necessarily have that same positive outlook .
At that point , and if you know that there's that disparity , having in that letter that you chose it based upon equality , not equity , is so important because , it is something that , whether you're the older one or not older , but the more well off one , or you're the one that is still trying to get that next big break that can be such a level of resentment
for your children if you don't take that into consideration . Now , that doesn't mean give more to the other child , or anything like that , but a lot of times it is . You have three siblings , then it's we're going to divide this into thirds right make it simple and all of that .
And so even if you are receiving the inheritance , understanding that your parents didn't choose it based upon equity , or whoever didn't choose it , likely , based upon equity , they chose it based upon equality .
And so just making sure that you have that understanding , looking at it as well as whether you're someone preparing an inheritance or someone receiving one , to just not let that resentment be harbored , and really because that can so easily divide a family .
Yeah , i think it's also to bringing in children earlier , but I don't know . I've seen some . I've been doing this for almost 24 years now And I have seen some crazy , crazy things .
I literally had a client that I respected so much And she was so easy to work for , such such a even a somewhat of a mentor to me over the years , because I kind of came up with her as her advisor from from nearly the beginning And I remember one of her children sitting at my office or sitting in our conference room going well , i need you to talk to
mother because I'm older than the others and I'm not as in good physical shape and I think I deserve my inheritance now .
Oh , you know , and so , unfortunately for the light , the last five years of her life that was my role was just make protecting her assets fending off from from family members And she eventually passed away And then the family has you know , i wouldn't say they squandered it necessarily .
One child probably has even fired us as an advisor because I kept telling them the truth . Yeah , well , you know , i was like no you don't need to buy a beach rental beach property .
Yeah , because it wasn't a good fit for their profile .
You have multiple bankruptcies in your past . This is what needs to happen with assets . This is how you need to live on this . You can . I wouldn't even try to get them to leave anything to their children . I was just trying to get them to make it through the next 10 years without having to work , and it's it's really .
It's really sad because you know that's our job as advisors is to tell them , is to tell the clients this is , this is the truth , and you try to do that with love , but it's a terrible situation in my mind , in my mind . You know , imagine this , okay , so right now we sit in a situation where we have six , seven percent thirty year loans .
So if you're a super successful family this is now I'm talking to the , our clients and listeners who are in the ultra high net worth category So you , you have You could probably do a 10 million in liquid assets . But let's , let's really push the limit . Let's say we have 30 million in liquid assets .
Right , you have the ability for For you , assuming your , your lifestyles is within check . It's a nice lifestyle to the outsiders , obviously , but You always have a friend has more right , but ultimately , you have the opportunity to create a family bank For generations .
You think about this like how the Rockefellers and the Kennedys and and all these big household names did this . But if you have enough , you're gonna inherit . You know you're passing down assets next generation . That next generation understands the theme and they could take those assets and put it Into like a pool .
So let's say you have three children and they each own a third of this , of this new entity , a trust . This is probably how you would do it . Grandchildren , great-grandchildren , they can borrow money From the entity that . you know what it is right now seven percent . So it's three point seven percent is what the IRS deans is a non-family loan .
Mean you have to worry about gift tax ? Yeah , that right . So you could go to the names of hey , we want to buy a house , we're gonna mortgage this through our own family money .
It's gonna be at three point seven percent , right , think about the Savings that you would have as as a family and didn't just really didn't apply as much for the last Decade and a half yeah , with such low it was such low rates . But now There's a real advantage to doing that . Home is is a secured investment .
There's also avenues and this is why I said it has to be 30 million or more , because 10 million You wouldn't want to take this risk , but I want to start a company .
This is my business plan , this is what I want to do and Basically , you're able to go to that family fund , family votes And basically you're able to then get seed capital to really maybe build something bigger , even for the next generation . So there's just so many opportunities that you have To build wealth and legacy . And all starts with a story .
All starts with this is what my great-grandfather did . This is how he built this company . This is this is how we as a family are gonna think about money going forward . But you can replicate that and a smaller scale for everyday Americans , right .
Yeah , that's neat .
Anything else to add , guys cows . Thanks so all right , thanks for hop it on to podcast with me . I appreciate that no problem . You guys are hard workers , have high reviews by all the clients , so appreciate all your hard , hard work , dedication to Pushing a fiduciary fee only model going forward love to be here .
We have a video about this on our YouTube channel does inheritance count as income ? We also it's called a wiser retirement on YouTube . Take a look at that also . Episode 2027 the cost of inheriting wealth , estate tax and opportunities to avoid it .
Talk about this a little bit there as well , and then we have another episode about legacy planning will throw in to our show notes as well . Thanks for listening today's episode .
If you're interested in learning more about us here at wiser wealth management or want to schedule a consultation To meet with with one of our fiduciary advisors , you can do so by going to wiser investor comm or you can always click on the episode notes . I Think that's it . See you guys next week .
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