A Complete Guide To Inheriting Money (Tax Planning)

I'm gonna start the episode with a story . I always wanna make sure that I'm making content that resonates with you guys .

As you guys , as I've mentioned before , I listen to a lot of podcasts and I don't like fluff content and oftentimes if someone who's a podcaster is like hey , here's our announcements for the week , like I know me , and I'm just like , great , let me skip this to get to the content I want to listen to .

So I try as much as possible to not make any skippable content or skippable announcements , so that you guys are listening to the whole show . I want it to be as impactful as possible for you . So , to the whole show . I want it to be as impactful as possible for you .

So I'm going to start with the story , then I'm going to go through the reviews of the week , the hate of the week or the interesting comment of the week , as I mentioned a few weeks ago , and then I'm going to go through those different laws and changes that might impact you .

So if you have , you know , inheritance that you think might come in the next few years , if you think it might be 10 , 15 years , if you go , hey , I've got an inherited account right now and I just don't know what I should do . I am going to answer those questions .

I just want to tell you this story so you can understand where I'm coming from and how I approach it with clients . So the way I want you guys to understand this is a child of a client came to me . They said , ari , I heard your episode on inheriting accounts before . I did one a while ago .

And they said I'm really worried because my father's your client and he's invested really well and I'm just really worried . I said why are you worried ? He said well , I'm worried because if I inherit these dollars , I think I have to pay taxes on them .

I go , that's partially true , based on the type of account Roth , pre-tax , et cetera but why are you even telling me this at all ? They go well , I'm telling you this because I think I'm gonna quit my job . I said why are you gonna quit your job ? And , by the way , guys , I know my clients very well , I know this child very well .

It was kind of out of left field kind of a thing . So I said why are you gonna quit your job ? They said , well , I don't love it , I go . That's not why you told me that you really want to be a physician and so I don't believe you .

They said , okay , fine , the reason I'm quitting my job is because you said on the podcast that if something happens , I'm going to be paying taxes on these dollars . I said , okay . They said well , you know I'm going to be a physician and I'm going to be in a really healthy tax bracket .

I'm here here in California , just like you , and you know we're getting crushed and so because of that , I don't want everything my father worked so hard for to get taxed at the highest possible tax rate . I said , okay , let's stop right there . Are you telling me you're no longer going to become a physician because your father invested ? Well , they go .

Yes , I go . That's not logical . They go , ari , I know that I can't imagine . This is the first time a client's approached you with something like this . This is not about logic . This is about the fact that my father is not from this country , invested really well , did all the right things , and I don't want him paying more than he needs to in taxes .

I said , okay , I need to think about an example to illustrate this for you . They go , ari , I don't care what logic you tell me this is , it's not going to resonate . I don't want to be a physician . I said , okay .

So the point of this story is not to scare all of you , but there's a risk of investing too well , where now , all of a sudden , a child alters their future . Now we had a long conversation . The child is still going to become a physician and we're going to be doing good tax planning . This is before we discuss that .

So they're going to be fine and they're not switching their career . But the point here is , I say there's the risk of bad planning and the value of good planning . Many of you know this , but my parents were burned by multiple advisors and that's why I am an advisor .

And if you're not doing it well meaning just financial planning in general children might take a whole nother position that they don't even want to take . They might not work . There's a risk if you invest so well that your children go well , I don't need to work , I'm gonna be fine .

There's another risk where you don't give them enough while they're still alive , when you could actually help them , and now you pass away with $20 million . So there's , of course , a balance to be had here . The point of the story is , I don't want you to invest so well that you now alter what your children were gonna do .

Now , it's very rare that this is even the case . But I like to start with the story and then I'm going to go through real inheritance examples and how you should think through all this stuff . So don't want to start on a sad note . By any means , it ended very well . The client is going to become a physician . They're happy about it .

There's no concerns there , just so you guys know . So what I'm going to start with now , after that story , is the comments of the week . So these are comments . Once again , every week , I'm going to pick the very nice review of the week and highlight that , or and slash .

I'm going to pick a comment that's either hate of the week or just an interesting comment that I want to highlight . So this one happens to be both . So , on a comment of a recent video this comes from Bob's 4718 . And if you're listening on the podcast app , great .

If you're on YouTube , you can see it right here he says who wants to be the richest person in the graveyard ? Seriously , die with zero dollars . Enjoy the life you work so hard for not leaving it for anyone . So , on that comment , if you haven't read the book , die With Zero , I highly recommend it .

I don't think it's perfect , and no book's perfect , but I like the approach , which is essentially hey , live the life you want to live . You don't get extra points dying the richest person at your grave . A lot of you are going , hey , I've got inheritance coming in , but I don't have kids . So , like , I don't want to die with $10 million . I'm like , great .

I think that would be a failure if you did , and so I'll joke with clients and I'll say what is your estate plan ? I promise guys , no advertisements on the show . Just a quick pause because I have a fun , exciting announcement for you .

I don't get to work with all of you most of you and I recognize that , and I'm the first person to say hey , it depends when you want to work with an advisor .

Oftentimes I'll say don't work with an advisor unless you have a certain asset threshold or if you're just the type of person that's like , hey , I just don't want someone else managing my money , but I still want guidance on all the strategies you talk about specifically for an early retirement .

So the exciting announcement is June 1st I'm coming out with my early retirement academy . I sent this email to a lot of you a few months back saying , hey , it's been in the works , I'm working on it .

I've been putting more time and energy and effort into this than you can imagine , and it's not gonna be for everyone , but it's gonna be for those that are saying , hey , I want access to the tools that you use on the YouTube videos , I want to run my own projections , I want that software , I want to make sure I'm not overlooking anything for my retirement and

I'll make it affordable for all of you . So what I'm doing is I'm putting that together . By June 1st it will be completed , and so , if you want a discount code before it launches , there's going to be a survey in the description of today's episode .

You can fill that out and that will put you on my email list so that before I actually release it , I'll give you the discount code and you'll have that before I launch it on June 1st . So just quick announcement there .

It's going to be an early retirement academy specific , for that will be everything you need to know If you want to retire early and run your own projections . It's not going to be you know you're speaking with me or my advisors that that's when people are working with me .

But some of you are like , hey , I don't necessarily need that , maybe in the future , but it's just a timing thing . And that's what I'm big about think about . When people say when should I work with an advisor , I say it depends . I just don't think everyone needs one . It's based on the stage of life you're in , the level of complexity and things like that .

So I want to put something together to help as many of you as humanly possible . That's why I do what I do . So keep your eyes peeled for that , fill out the description in the survey and let's get back to today's episode . That's estate planning . So some of you are going , yep , that's exactly what I'm trying to do .

Some of you are like , hey , I wanna leave 2 million bucks to each child . I just wanna make sure I'm not a future burden to my children . I also wanna make sure I'm helping myself along the way , because they can make more money if they need to , because they have time .

So , understanding this comment , I get it you don't wanna die with the richest person in the grave . I agree . Want to make sure estate planning it's different for everyone . So what I don't want you to do is take a cookie cutter approach and go .

Well , you know , yeah , I don't have kids and I'm not married , and so because of that , I'm going to have the same retirement plan as my neighbor and I'm going to retire at 60 , just like them , or 62 . Don't do that .

If you don't have children and you don't want to give $2 million to eat three different kids , hey , you could retire a lot earlier and you can spend way more . Not because it's good or because it's bad , it's just that's the reality . If you want to give 5 million to each child and I have clients that want to do that I say great , here's what's happening .

You're working seven more years and you're traveling to this degree and they're like cool , I'm happy to do it because that's what I want to have happen at the end . So not right or wrong . Then the hate comment is a reply to this comment .

It's really not a hate comment , but this comes from K-A-T-O-V-O-M Cozies , so Katovom Cozies , sorry if I'm not pronounced that correctly . And they reply . They say ultimate boomer comment with the laughing emoji Hope you leave something for your heirs .

And so some of you might read that or hear that and go hey , that's really mean you know calling this person a boomer . And so I'm going to read to you the reply from the original person who commented the first comment . So the first person once again the Bob's 4718, . He said who wants to be the richest person in the graveyard ? Seriously , die with zero .

Enjoy the life you work so hard for . I'm not leaving it for anyone . So the person replies ultimate boomer comment Hope you leave something for your heirs . So the first person says hey , yes , boomer is indeed the case . I just loved his reply . He goes yep , boomer is indeed the case . Like , yep , owning it .

In the same way , a lot of you like hey , why are you talking about retirement planning ? You look like you're 12 . It's like I love this stuff more than anyone you probably know . And so like , yep , I'm young , I love it . That's me . I'm weird . So , yes , boomer , is indeed the case .

Um , we have no kids , only nieces and nephews , and we already spoil them rotten . Money left behind for others is okay , but time spent and money spent on family while you're still alive is so much better . It's about the experience , not the money left behind , spending every cent . So I love it's not right or wrong , it's just .

I love the way he's like hey , I wanna help , I just to help , I just want to help while I'm here . I don't want to die with a gazillion dollars .

Let me understand once again that I have a different situation , and so I think , when he was maybe replying with that comment , or she or they never know nowadays , you know , I want to make sure that they are absolutely looking at this in their specific lens , not because their neighbor or coworker or any of that .

We have a phrase for that that we call head trash , where oftentimes , if you're retiring early or thinking about it because you are in a good spot , but your neighbor isn't , your coworker isn't , your friend isn't , you're like hey , maybe I'm not in a good spot . No , no , no , that's head trash .

You could be in an amazing spot and they might not be , and that's just the case . So that Now that we've been through the little story and the comments of the week , the real question a lot of you are asking is hey , I'm gonna be inheriting some money . I don't know the tax implications , I don't know how to think about this .

Before I give you a 30 , 40 minute lecture , where half of you are trying not to fall asleep , even if you're nice and trying to listen to me there's a flow chart that we created , okay . So what I want you to do , I'm going to put it up right on the screen right now so you can see it .

If you're on YouTube watching , if you're on the podcast and you're just listening , that's okay too . It's in the description , so you're going to see me go through this . The best thing would probably be pulling it up while I'm actually going through this , but you don't need to do that . If you're driving , don't get in a car crash or anything crazy like that .

Some people tell me hey , if you can listen to me , do tax planning while working out . Like kudos to you . I listen to history podcasts while I work out , but once again , I'm weird . So this here of can I delay distributions from the traditional IRA I inherited . That's the question I'm going through .

So some of you are like , hey , I'm not inheriting a traditional IRA , I'm just getting a brokerage account , or I've just got cash coming in , or my parents are going to sell a home and I'm going to get a portion of that . It becomes complicated quickly . This is why we exist as financial advisors .

So if you are looking for a holistic approach for everything , not just the investment stuff so I'll joke with my clients in new clients specifically , I'll say hey , if you reached out and you only want investment guidance meaning no tax or withdrawal or state health care insurance I go , don't hire us . Okay , hire 10 firms down the street .

I might even help you pick which one , because they don't do what we do . We do holistic , which is everything . Some people don't want that . Like great . Once again , we're probably not the best fit . We're the very first person I'm the first person to put my hand up and be like we don't work with everyone .

We work with those that want the next level of planning and the specific tax planning is what we specialize in . So the question here for a lot of you is hey , I inherited a traditional IRA . You might be the spouse of someone meaning someone passed away , someone very near and dear to your heart and you've got this IRA .

You're like I don't know what to do . You might go hey , I'm the child and I don't know what I'm going to do . I'm going to inherit this in six months . Or , you know , I'm going to inherit this in two years and so I want to plan for it intentionally Lots of different tax planning stuff .

So this flow chart is something you can go through and it's very , very easy . That's why we created it . You can go you know , did my father or mother pass away at this time ? Okay , yes , it was before this period . So here's what this means . Now I'm going want to see it for yourself and take some more time and just figure out the answer .

You can absolutely do that as well . So this is why I do that . Now there's a few things I want to bring up here . The few like simple answers . Once again , I know all of you are very busy . As much as possible , I want to give you the answers right away , real quick , just some loose stuff .

If you're a spouse , you've got more leeway , way more options . So , like , don't stress , if you're a spouse a lot of different choices . You can make the ira your own Um , you can roll it over into another account . You can make yourself the beneficiary like . You have tons of options .

So not that you're stressing , but if you're like , oh my god , my spouse just passed away , what do I do ? You're gonna have more flexibility than if you're inheriting this as a child . Um , now , in terms of inheriting an IRA , you definitely need to make sure you're doing the right rules , because if not , the taxes become a little crazy .

Now it becomes once again complicated very quickly . But you've got two options . If we're putting it really simple , you can transfer the assets into an inherited IRA in your name . And now you're choosing to take these what are called RMDs required minimum distributions over your life expectancy or that of the person that passed away .

You're like , hey , what is that in English ? I'm going to go through in a second . The other option is you can transfer the assets into an inherited IRA . So once again , it's an IRA of , let's call it , my mom , my mom , susan . Susan passes away hopefully not anywhere time soon , but Susan passes away . I'm now going to make it Susan's inherited account .

So , once again , my name is Ari . I can make it Susan's inherited account , so I can transfer that into an inherited account . I can do that and I can choose to take the distributions over 10 years . So once again , let's go back to that first story .

Someone's the child of the client was like hey , and I'm not going to say their name because they didn't want me to . So they said , hey , don't use . They said well , ari , once again I'm going to become a physician , a high tax bracket . What do I do ?

Well , let's assume they're in a really high tax bracket and they're like oh my God , I think I have to take this money . And you know , my father invested so well . I'm so scared to pay so much in taxes . I go , you will . But you can be strategic here . You don't have to take it all at once . You can take it .

So let's assume you have an epiphany after five years . You don't want to become a physician and you stop working , your spouse stops working and there's no income . Well , that might be a great year to take more of the account because you don't have as much taxable income . It just has to be completed by the end of the 10th year . So you're .

Oh , so there's more strategy involved ? Yes , there is . So this is why I say tax planning is integral . Now it must be liquidated . I mean it has to be zero by December 31st of the year , that is , 10 years after the original owner's death . So lots of options and planning and things we're going to talk about on this . The main things here .

I've got my little checklist . I want to make sure estate planning and rules lots of stuff are changing , the kind of easy , low-hanging fruit . Don't ignore beneficiary forms . I've seen it where the beneficiary was not listed correctly and they were going to get the assets because it was clear that the name was just misspelled but it was a hassle .

So , like , make sure , when it comes to prepping your estate plan , you've got all the right things in place . Some of you have asked me like , hey , I don't have a trust , does that mean I don't get ? No , no , no , trusts and wills and medical directions and power of attorneys all important stuff . That doesn't apply If you have an IRA .

You don't need a trust . You just list a beneficiary directly on there . It's the simplest , easy way . Don't overcomplicate it . If there's no designated beneficiary , then it goes to the estate and the issue there is the beneficiary will be stuck with a five-year distribution rule instead of a 10-year distribution rule and it becomes a whole lot more complicated .

So a lot of these forms are misleading More often than not . I just tell my client would you please let me fill it out for you Now , for compliance purposes . Let's make sure you understand what you're signing , why you're signing .

I'm explaining it to you , but we're just doing it for you because you can click , you know , one box incorrectly and now it's a hassle . And then , lastly , some people are like hey , what about that Roth IRA ? Roth IRAs are awesome . If you're inheriting a Roth IRA , there's lots of different tax planning things you don't need to worry about so oftentimes .

You know what do I do about that ? You still have to take money , but not taxed , and a lot of different planning tools , so don't stress about that . So this flow chart that I've created for all of you , you're going to be able to read it . So if I'm reading it with you right now , even if you're just listening on the podcast app , that's okay .

The first question here you're going to see in the upper left where it says start here . It says did you inherit a traditional IRA from an account owner other than your spouse ? Okay , other than your spouse . So let's assume the answer is yes . So , yes , you're inheriting it from someone other than your spouse . Let's call it your dad .

Okay , great , got that From there ? Did the owner of these IRAs ? Did your dad pass away after December 31st 2019 ? Okay , got it . Let's make sure , once again , let's keep it English here , let's not make it Portuguese . Okay , so I had a dad . They passed away . Wasn't fun from there ? They passed away . Yes , it was after 2019 .

Let's assume they passed away last year . Got it ? So 2023 . So we follow the chart . Did they pass away after ? Yes , okay , keep going . Was the owner ? You're going to see the little arrows you can follow Was the owner of that IRA the account's original owner ? So you're like okay , let me make sure my dad passed away in 2023 . Were they the original owner ?

Okay , did my dad inherit that from someone else ? Or did my dad first open the account ? Okay , my dad first opened the account ? Great , and so was he the original owner ? Yes , he was the original owner .

Next question At the time of the owner's death , when the father passed away in 2023 , were you either a minor child of the owner fewer than 10 years younger ? So , less than 10 years younger than the owner , disabled or chronically ill ? Okay , so let's assume the answer is no . Okay , so let's assume the answer is no . You are not a minor child .

You are not fewer than 10 years younger . It was much more than that . You are not disabled and not chronically ill , which is the case for 90% of you , 95% . Okay , so then you're gonna see . It says you are a non-eligible designated beneficiary . What does that mean ? Okay , you are not subject to RMDs . That's what does that mean ?

Okay , you are not subject to rmds . That's the first thing it says there . So , once again , my job oftentimes is telling clients hey , don't worry about it , I'll . I teach my clients .

One of the things you're going to start to say is that sounds interesting , but it doesn't apply to me , because all the time your neighbor and co-worker friends go , hey , didn't you hear that rule changed and you should do this , and that , hey , that's great , sounds interesting , doesn't apply to me .

So you're going to see the first thing there you are not subject to RMDs . The greatest deferral allowed is under the 10-year rule , by which you must withdraw the entire account balance by the end of the 10th year after the year of the prior owner's death . Okay , total English , let's hit it . Okay , your father passed away in 2023 . Now you're going .

What do I do ? Okay if you were not disabled fewer than 10 years . All that good stuff I just went through . You have 10 years to take this account and you can be strategic as to how you take that . Now there are rules that are changing . They're saying you have to take a portion every year . A lot of different nuance here .

Okay , but the point here is the loose current legislation today , and I call it loose because it feels like they change it every week . But this is how I want you to think about it and you might go whoa , okay , so I've got some options you do . Now you need to be strategic . Now let's go the other way , okay .

So some of you I'll tell you right now tune out . This is now I'm gonna go through it . What if it's the opposite ? What if you're like hey , no , I've got like a brokerage . Your dad bought Apple stock for $10,000 . Now it's worth 10 million . And you're like , dad , you know I really miss you , but you gave me 10 million bucks .

So , like , I appreciate it , but doesn't replace having you . But like , I think I'm going to pay a lot in taxes . No , okay . So with a brokerage account , there's a step up in basis , so you're inheriting it as if you just bought it for 10 million bucks . You're like well , what about the taxes from the $10,000 to $10 million ?

Don't worry about it , okay , it doesn't apply to you . Now , this is very rare . I'm just going to mention it because it comes sometimes . There's something called net unrealized appreciation . Don't worry about the details because you might fall asleep . Not because you're not competent , it's just you're not doing it all day , every day . Here's the basic premise .

Let's assume you've got $5 million of , but it's in your 401k , okay , whoa , that's very different 401k brokerage account . So it's in your 401k , meaning you have a lot of company stock . Okay , when you do that , you invested well , like good for you . But now you have a choice .

Most people say , yeah , I'm gonna move that money that's in my 401k that's Apple stock to an IRA . Okay , I'm gonna move the money it's got a rollo Great . You might not want to do that , and the reason you might want to do that is when you take that money out , it's ordinary income .

You have an option to use what's called net unrealized appreciation where , instead of moving this big concentrated stock position , your 401k , you can say wait a second , I have an option I'm going to go ahead and use like my , like my card , my NUA card , if you will , and what that allows you to do is say I'm going to intentionally pay taxes on the original

cost basis so that the rest of it moves to a brokerage account . You're like well , well , well , brokerage account why that ? Versus the IRA ? Brokerage account gets capital gains tax treatment . It's more preferential , it's better than ordinary income treatment .

So the point here is , if you do that , some of you are like , ooh , can I , like you know , skip the rules here , maybe do this NUA thing , and then all of a sudden you know it's all in a brokerage account and then I pass away the next day and then you know my child doesn't have to pay tax on it . No , okay .

So there's a lot of rules and nuance here . That gets confusing quickly . But the point of it , to keep it simple , is , if you're going down this flow chart once again and you're like wait a second , did I inherit this IRA from other than my spouse ? Yes , okay . So once again , you inherit from your father .

Did the IRA owner pass away after December 31st 2019 ? Before we said yes . Now let's assume no , let's assume you inherited this before 2019 , okay . You're like oh my God , what do I do now ? Oh my God , how do I think about this ? Do I just do I quit my job ? No , okay , you don't freak out .

You work with a planner because the rules are very , very different . But to keep it really simple , the RMD changes and the applications and the 10-year rule it becomes overwhelming what I'll say here . Refer to the flow chart , but understand the details are gonna very quickly . Here's what I'll tell you .

Most of you are like listen , I think I get the basic premise asset allocation , social security and tax planning in general but when it comes to inheriting and tax planning and the strategic , I've never had someone come back . Hey , I've got my tax plan for when I inherit this account .

Can you just validate that doesn't happen , okay , because this is the nuanced level . Go to the flow chart . You can see here there's a lot of details . Don't get lost . What I want to do today is make sure you understand simply how do you think through this ?

Roth IRAs specifically , if you're inheriting those , what potentially might you have to think about If you take it all at once ? Are there tax-free consequences ? Guys , don't burn yourself where you're trying to become a financial advisor in retirement . Okay , this is what we love spending our time doing . This is all we do .

So if you are looking for assistance on anything inheritance , things like this related this is what we do , okay , so don't freak out if you're like , oh my God , I don't know where to go . What do I do with this stuff ? That's what we do .

Now , what I want to make sure you understand when leaving all of this is , if you're going to inherit accounts , it really is intentional to be strategic about the timing as to when you take that money . Now you can't be strategic as to when your father , mother , et cetera , passes away , but you can be strategic as to how you take the income .

And what I don't want to have happen and this is my final message for all of you guys before we tune out for today is you go , wait a second . I'm not going to be strategic with tax planning . I know I should , but I'll get to it when I get to it . And then here's what happens , because I've seen this Social Security gets turned on .

You have required minimum distributions from your personal IRAs , pre-tax accounts , 401ks , et cetera . So , social Security , your pre-tax accounts , there's a pension , there's rental income , and now you've got inherited money and now you're getting taxed out the wazoo and you're like well , why didn't I think about this stuff earlier ? That's why I'm bringing it up now .

So I joke that I'm the meanest early retirement advisor . My job is not to be your best friend . My job is to give it to you straight and , yes , we can be friendly . So I want to make sure you are not paying more tax than you need to . That's it for today's episode , guys , hopefully . So please do , of course , leave a review If this has been helpful .

Leave a comment on YouTube . Let me know if you want more content like this and what other content you're looking for . And finally , it's more fun to retire with a friend . So I encourage you , if you don't mind sharing this with someone that you wanna go travel with and have fun with in retirement , even if it's your spouse .

So hopefully , guys , this was helpful and love you guys . Talk to you next week .

Please do rate it , review it and share it with someone who you think would benefit from this information . If there's anyone out there that you know , I certainly appreciate it and I will see you all each week . Hey guys , it's me again . Please be smart about this . Nothing in this podcast should be construed as financial , tax or legal advice .

Consult with your tax preparer or financial advisor before taking any action . This podcast is for informational purposes only .