Investment Newsletter for the end of August, 2017

The market was flat/very slightly down this month. Nothing exciting. Today, I want to discuss what happens to your money after you are gone. How does it transfer to your heirs?

First, let’s separate your accounts between tax deferred and after tax. Tax deferred is money that you have never paid income tax on. IRA’s, 401k’s, 403b’s, annuities, contract receivables on the sale of a building, etc. are examples of tax deferred. After tax is your real estate, portfolios in personal name, etc.

When you die, all your AFTER TAX assets revalue to fair market value. It is called step up in basis. You paid $100 for the lot 50 years ago. On your death, it is worth $500,000 (it is a nice piece of dirt). Your heirs list their cost as $500,000. They sell it for $500,000. No capital gain or loss. If you give the lot before death, no step up. The heirs keep your $100 cost and get burned on their tax returns. Step up is only for inherited property.

Tax deferred assets do not have step up. The income tax you did not pay has to be paid by your heirs. It is also at ordinary income tax rates not capital gain rates. Annuities are bad tax planning for this reason. If your spouse is your heir, the accounts can be rolled over into their names without tax (spouses are an exception to what I just said). Your children do not get that exception. They have to pay income tax on this money. The IRA type accounts are rolled into an inherited IRA. There is a minimum amount they have to take into income each year based on an age based formula.

A tax planning step is to see whose tax rates are higher. My mother is 93 and has a small IRA. She is going strong but obviously not forever. Because of medical expenses and limited income, she has a tiny tax rate. She also is a Washington resident which has no state income tax. My siblings and I are all in higher tax brackets than her. Three out of the four are in Oregon and California, both of which love to collect tax. I am accelerating her IRA distributions. I want the income on her return not her childrens’.

Tax deferred assets (IRA’s and the like) and life insurance normally have a contractual listing for beneficiaries. These HAVE TO BE RIGHT. These designations override the will. They override the trust. Your will/trust can say ‘I give equally to my three children’. If the IRA says the name of your ex-wife from 40 years ago, she gets the money. Same thing with life insurance. The beneficiary is contractual and is more important than the will/trust. Major ugly stuff happens here.

Personal accounts also can have designated beneficiaries. I set them up for clients all the time. I have them set up for my accounts.

Giving money to your children, grandchildren, your friends, whatever is not taxable income. If you give any amount, even millions, it does not become income to them. The $14,000 per year per person limitation is to avoid inheritance tax when you die. This tax is on your estate, not on your children. You have a lifetime federal exclusion of over $5 million. Oregon has a state exclusion of $1 million. For my Washington clients, over $2 million. For my Arizona, California, and Mississippi clients, no state inheritance tax. If you have less than these exclusion amounts, do not worry about the $14,000 per year. If you have more, call me for better tax planning.




Investment Fee Schedule

Rate Assets Under Management
1.44% Below $125,000
1.00% Between $125,000 and $750,000
.85% Between $750,000 and $1,250,000
.80% Between $1,250,000 and $1,750,000
.75% Between $1,750,000 and $2,500,000
.70% Between $2,500,000 and $3,250,000
.65% Between $3,250,000 and $4,250,000
.60% Above $4,250,000

A single rate is applied to the whole account. Compared to my old fee structure, under the new fee structure the cost for a $1 million account would be $500 lower per year and the cost for a $1.5 million account would be $1,500 lower per year. I will still waive personal tax return fees for accounts over $1 million. All services stay the same. I am just lowering my upper end fees. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.

As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. Please contact me if you would like to submit a post to my blog.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did my newsletter make sense? Do you agree or disagree with what I said?

Learn About My Business


Leave a Reply

Your email address will not be published. Required fields are marked *