Beware, the IRS is eyeing your inherited money (via Bill Bischoff)
One of the perils of being well-off is the constant risk that the federal government and/or your friendly state and local tax collectors will figure out new and different ways to snatch more of your wealth. Especially wealth that you earned the old-fashioned way: by inheriting it. To raise your paranoia to the appropriate level, here are two new things to worry about.
The noncontroversial good stuff The SECURE Act is allegedly intended mainly to encourage more businesses to offer retirement plans and expand opportunities for workers to invest their retirement account funds. Good. And it would allow you to continue to make contributions to traditional IRAs after reaching age 70½, which is not permitted under current law. Fine.
For example, say you inherit Uncle Henry’s $500,000 Roth IRA when you are 40 years old. The IRS table says you have 43.6 years to live. You must start taking annual RMDs from the inherited account by dividing the account balance as of the end of the previous year by your life expectancy. So your first RMD would equal the account balance as of the previous yearend divided by 43.6, which would amount to only 2.3% of the balance.
To be fair, the SECURE Act’s anti-taxpayer RMD change would also not affect accounts inherited by: the spouse of the deceased account owner, a beneficiary who is no more than 10 years younger than the deceased account owner, a minor child of the deceased account owner, or a disabled or chronically-ill individual. But everybody else would get slammed by the new 10-year account liquidation requirement.
Proposed IRS regulations issued late last year would provide some protection by stipulating that folks who make large gifts while the ultra-generous TCJA exemption is in place would not be penalized if the exemption reverts back to the much-lower pre-TCJA amount in 2026.
Example 2: If Able instead gives away $11.4 million this year, his remaining estate in 2026 would be only $1.6 million . To calculate the estate’s federal estate tax liability, the $11.4 million of gifts made this year are added back to the $1.6 million date-of-death estate value, resulting in a gross estate of $13 million. According to the proposed regulations, the estate tax liability would then be calculated using an $11.4 million exemption. So the estate would owe federal estate tax on $1.
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