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Do I Pay Taxes When I Inherit?

Capital gains taxes are then calculated, so you pay taxes only on appreciation that occurs after you inherit the property. Yahoo Finance’s recent article entitled, “Do I Pay Taxes Automatically If I Inherit Property?” says there are three main types of taxes that cover inheritances:

  1. Inheritance taxes are taxes that an heir pays on the value of an estate that they inherit. There are no federal inheritance taxes. However, six states have an inheritance tax.
  2. Estate taxes are taxes paid out of the estate before anyone inherits. The estate tax has a minimum threshold, and as with all other tax brackets, the government only taxes the amount that exceeds this minimum threshold, which is $12.92 million ($25.84 million per married couple).
  3. Capital gains taxes are taxes paid on the appreciation of any assets an heir inherits through an estate. They’re only levied when you sell the assets for gain, not when you inherit.

The cash you inherit is taxed through either inheritance taxes (when applicable) or estate taxes. With inheritance taxes, you must file and pay this tax.

With an estate tax, the IRS taxes the estate directly.

Therefore, it’s uncommon for an heir to owe any taxes, including income tax, on inherited cash.

The IRS does not automatically tax any other forms of property that you might inherit. However, you’ll owe capital gains taxes if you choose to sell this property.

When you inherit property, whether real estate, securities, or almost anything else, the IRS applies a stepped-up basis to that asset. This means that for tax purposes, the base price of the asset is reset to its value on the day that you inherited it. If you inherit property and immediately sell it, you’d owe no taxes on those assets.

Two prices are involved in establishing a capital gain tax: the sale price (how much you sold the asset for) and the original cost basis (how much you bought it for).

Reference: Yahoo Finance (Aug. 27, 2023) “Do I Pay Taxes Automatically If I Inherit Property?”

Why Is Stretching So Important?

Stretching — especially before bed — is an excellent aid for longevity. It has many benefits, from easing stress and improving sleep to reducing inflammation and menopause symptoms (among many more), says Livestrong’s recent article entitled, “Want to Age Well? Do This Every Night Before Bed.” Here are the benefits of stretching before bed for older adults (and everyone else), plus which bedtime stretches are best.

  1. It Eases Stress. Stretching profoundly stimulates the body’s parasympathetic nervous system, which is responsible for resting, digesting, and healing the body. That’s why a mindful stretching practice before bed is an effective tool to help ground us and inhibit the sympathetic nervous system for better health.
  2. It Reduces Inflammation. Regular stretching can have a great effect on decreasing inflammatory markers in the body. Gentle stretching at a low intensity can help you relax and stimulate the parasympathetic nervous system, which has an inflammatory regulating response.
  3. It Can Improve Your Sleep Quality. Age is linked to difficulty falling and staying asleep. Therefore, winding down before bedtime can be challenging for many people. Stretching can also positively affect your sleep.
  4. It Lowers Your Risk of Injuries (Including Falls). Stretching increases the force-length relationship of your muscles, so your muscles can both produce and manage a greater amount of force at various lengths. This can help decrease muscle and tendon-related injuries. Longer muscle lengths may allow the body to maintain balance and avoid falls, which is especially important as we age more effectively.
  5. It Increases Blood Flow. Stretching can stimulate the parasympathetic nervous system, dilating the blood vessels to the muscle. Therefore, stretching would also theoretically increase blood flow to the muscles. That’s especially important because some older adults deal with blood flow-related health issues.
  6. It Decreases the Frequency and Severity of Leg Cramps. Leg cramps are more common in older people because the tendons (the connective tissues that attach muscles to bones) shorten as you age. The frequency and severity of leg cramps also relate to poor hydration levels and nutrition deficiencies. Since older people are more likely to be dehydrated and lack certain essential nutrients, this puts them at a greater risk. Stretching at night may alleviate leg cramps.
  7. It Helps With Menopause Symptoms. Light to moderate stretching can likely improve symptoms of menopause, such as hot flashes, sleep problems and mood fluctuations.

Reference: Livestrong (June 1, 2023) “Want to Age Well? Do This Every Night Before Bed”

Are CDs Good for My Estate Plan?

Certificates of deposit (CDs) are a low-risk way of saving funds for the short term and earning a modest return on it. When you take out a standard CD, your bank or credit union guarantees that they will pay you a set return on your money. In exchange, you agree to leave your money untouched in the account.

Investopedia’s recent article, “Can You Bypass Probate With CDs?” says that because CDs are a low-risk, time-constrained investment, they’re popular among seniors and often form part of inheritance settlements. When the owner of a CD passes away, it can be inherited in one of three ways. Therefore, it’s a way to pass on money without the CD going through probate.

CDs are treated like any other account as far as inheritance. While probate is frequently used to decide who will inherit particular assets after someone dies, other ways of passing on accounts can be much simpler and less expensive than probate.

There are three common ways to inherit property; only one involves probate. First, some property is jointly owned, passing directly to the co-owner without probate. This applies to joint accounts (including joint CDs) and real estate owned jointly.

The second category is contract property, like life insurance, retirement accounts and non-retirement accounts with beneficiaries designated upon death. These designations override instructions in the will and pass outside of probate directly to the named beneficiary. These accounts are often designated as payable on death (POD) or transfer on death (TOD). It is possible to add this designation to your CD account.

The third category is everything else. All property not covered above will generally have to go through probate.

If you want to avoid probate for the money you hold in your CD, there are two options available to you—you can either add a payable-on-death (POD) beneficiary to your account or hold it as a joint account. CDs can be held as joint accounts. However, the rules vary by state. In some states, if one joint account owner passes away, the other owner is automatically given full ownership of the account. If you inherit a CD in this way, it will typically continue to run in the way it was before. Once it reaches maturity, you can close it and withdraw the funds. In other states, if the joint owner of a bank account dies, the funds are divided between the surviving owner and the estate of the deceased.

Some CD accounts allow the owner to name a payable-on-death (POD) beneficiary. If the account owner dies, this person will automatically inherit the funds in a CD. These banks may terminate a CD when the account owner dies and allow the POD beneficiary immediate access to these funds. Other institutions will make them wait until the CD reaches maturity. In either case, the CD won’t have to go through probate.

Reference: Investopedia (August 23, 2022) “Can You Bypass Probate With CDs?”

How Can I Successfully Transfer My Business to My Children?

According to ITR Economics, out of the 77 million Baby Boomers in the U.S., an estimated 12 million are privately held business owners.

As ownership of businesses for those born between 1946-1964 is transferred to the next generation, an estimated $10 trillion worth of business assets is expected to be transferred in the coming years.

AZ Big Media’s recent article, “Passing the torch: Considerations for a successful generational business transfer,” explains the best way to have a successful business transfer.

Develop a Strategic Plan.  A successful generational business transfer takes time and planning. You should begin the planning process way in advance of the change in leadership. This can give a family time to define what the future of the company looks like. Determine what technology, human resources, and capital requirements the company needs to be successful in the short and long term. Ensure that the current and future owner’s visions are communicated. If both visions aren’t in alignment, discuss what the future for the business may look like. Balancing long-standing business practices with new changes can mean a sustainable and successful business. Begin integrating the future leader into day-to-day business operations before transitioning. Establishing a clear transfer of duties and mapping out a timeline can help with a smooth transfer process.

Get Finances in Order. Preparing business finances in advance of a generational transfer is critical. The current business owner may consider setting up a grantor-retained annuity trust for their successor. An experienced estate planning attorney can help to create this trust, which earns annual income for the beneficiary receiving the funds with minimal or no gift tax liability upon expiration. Family members may also consider transferring their business to the successor through an installment sale, which is a sale of property where at least one payment is received after the tax year in which the sale occurs. Note that an installment sale could mean a tax benefit for the seller because the overall tax liability is spread out over time rather than all at once during the business transfer. Once you decide on the preferred financial path to conduct the transfer, look at the company’s cash flow and other financial projections. List the projected expenses, liabilities and potential taxes owed, and then identify sources of liquidity to pay them.

Work With Financial Partners. If not already in place, look to assemble a team of trusted advisors, including a CPA, attorney, banker, and wealth advisor. This team can work through the financial aspects of any generational business transfer.

Transferring a business is a major family event involving potentially tough conversations and decisions. This can be a complex process. However, with proper planning, it also has the potential to be an opportunity to achieve new growth and elevate long-standing family business goals.

Reference: AZ Big Media (June 8, 2023) “Passing the torch: Considerations for a successful generational business transfer”

Boomers, Beware: Don’t Spend Your Money This Way in Retirement

Whether because they feel like they’ve earned the right to splurge or because they don’t understand how problematic overspending can be for a retirement budget, there are several things Boomers really need to skip. This recent article, “8 Things Boomers Should Never Buy in Retirement,” from msn.com, explains.

Overpriced vacations. Most retirees hope to travel during their golden years. If it fits with their budget, that’s great. However, even if your nest egg boasts seven figures, a $50,000 around-the-world cruise every year will quickly empty even the biggest retirement accounts. This is an exaggeration, of course, but what is “overpriced” depends on your lifetime and your retirement funds.

Extravagant gifts. Retirees are often a little too generous with making gifts, enjoying seeing the next generation or grandchildren benefit from their largesse. However, too many gifts will empty the savings needed for a long retirement.

Unnecessary or Overly Expensive Home Renovations. There’s nothing wrong with occasionally upgrading your home if you plan to age in place. Putting in grab bars in showers, adding lighting, etc., will make your home safer and could enhance its resale value. However, is now the time to install the latest solar panel system or redo the kitchen with top-of-the-line kitchen appliances? It is probably not the best investment for your retirement budget.

Buying Discretionary Items on Credit. Most retirees live on a fixed income from Social Security and retirement or pension income. If they spend beyond those amounts, they’ll do so by going into debt. Credit card debt is very expensive and will drag down even the best-created retirement budgets.

Timeshare Vacation Homes. Traveling to another location for a few weeks or a month every year or trading with other time-share owners to go to different locations is very appealing. However, the reality is that timeshares are expensive and restrictive. They are not easily re-sold, rarely appreciate value, and have ongoing expenses. You’ll be better off taking traditional vacations.

Excessive Life Insurance. If you didn’t purchase life insurance in your 40s or 50s, by the time you reach retirement age, the cost of a new life insurance policy could prove to be prohibitively expensive. If your kids are grown, the mortgage is paid off and your retirement accounts are in good shape, this may be an expense you can skip.

Out-of-Network Medical Services. Medical expenses typically increase as we age. However, don’t spend more than you must. Most insurance plans charge more if you use a doctor or other healthcare provider who’s out of network, so it pays to find an in-network provider before undergoing any procedures.

Let Your Children Pay for Some Things. It’s natural to want to spend money on your family but be protective of your nest egg. Gifts are one thing, but paying for an adult’s cell phone bill, rent, or credit card debt will drain your resources fast.

Everyone’s financial situation is different, but remember that spending in some of these categories will likely cause more financial difficulties than you need. The best advice? Stick to a budget, and don’t live beyond your means. It’s much harder to dig yourself out of a financial hole when living on a fixed income.

Reference: msn.com (Aug. 18, 2023) “8 Things Boomers Should Never Buy in Retirement”

What is the Best Estate Plan to Keep Family from Killing Each Other?

It’s not unusual for families to fight over inheritance, leading to prolonged legal battles and damaged relationships. The Ascent’s recent article, “How to Create a Will That Keeps Your Family From Fighting,” provides some tips on how to create a will that keeps your family from fighting.

Discuss your intentions beforehand. Parents need to discuss the objectives and intentions of their estate plans with their children. This lets them set expectations. You don’t have to reveal dollar figures or investment assets. Instead, the key is ensuring the children understand the rationale behind the will.

Splitting up unique assets. Dividing up unique property can frequently result in fights. You may have sentimental items that multiple family members have expressed interest in, or maybe a piece of property has sentimental value to one family member over the others. You may want to speak to family members beforehand to see if any items are particularly important to them. It’s crucial to be clear in your wishes and make sure that everyone is on the same page.  You should also use specific language in your will that outlines who gets what and under what conditions.

Preserving inheritance for blended families. This can be even more complicated for blended families. It’s important to approach the division of your assets with sensitivity and thoughtfulness to avoid potential conflicts among family members. Parents with children from previous marriages should take extra care to protect those children financially because stepchildren can be disinherited once a parent dies. Separate wills for each spouse can add protection. There’s something called a “contractual” will” where each spouse agrees that the surviving spouse doesn’t have the legal right to execute a new will that disinherits the children of the deceased spouse. This is designed to ensure that each spouse’s assets are distributed according to their wishes and prevents the surviving spouse from making changes that cut other family members out of the will.

Creating a will that keeps your family from WWIII is a valuable process. Parents should be open about their estate plans with their children to ensure that they understand their intentions. Communication is vital when it comes to estate planning.

Reference: The Ascent (Aug. 15, 2023) “How to Create a Will That Keeps Your Family From Fighting”

Why Is Daughter of Comic Book Legend Stan Lee Looking for More from Estate?

On Nov. 12, 2018, the legendary comic book creator Stan Lee died of heart and respiratory failure in his sleep at age 95. Lee had amassed a fortune estimated at between $50 and $70 million through the iconic characters he co-created, including Spider-Man, Black Panther, and the X-Men. In his final days, he’d allegedly suffered elder abuse and been financially abused by several people in his inner circle.

Microsoft’s recent article, “Here’s Who Inherited Stan Lee’s Estate After He Died,” explains that Lee’s daughter has continued pursuing various legal actions to get everything.

“I want my museum, I want to do a restaurant — Stan Lee’s Super Subs — I want to do a big Spider-Man Stan monument to put my family’s ashes somewhere,” she told AARP. However, one of those lawsuits against Pow! Entertainment regarding her father’s intellectual property was thrown out of court for being “meritless,” and Lee was sanctioned $1 million in 2020.

Stan Lee married Joan Boocock in 1947, and their daughter J.C. was born in 1950. Until she died in 2017, Joan kept a steady hand on the rudder of the family’s assets, according to AARP The Magazine. But J.C. wasn’t very good with money, according to her dad.

He and Joan created a trust to prevent her from burning through her inheritance before her parents died. The control of Stan Lee’s fortune allegedly led to J.C. shouting and physically abusing her elderly father.

In February 2018, Lee filed a notarized declaration with his attorney in which he said his daughter would often ring up credit card charges of $40,000 a month and that when the two disagreed about money, she “typically yells and screams at me and cries hysterically if I do not capitulate.” He worried that “after my death, she will become homeless and destitute” if he changed the trust stipulations.

The declaration blamed Jerardo “Jerry” Olivarez, Keya Morgan, and J.C.’s attorney, Kirk Schenck, for unduly influencing Stan Lee’s daughter to “gain control over my assets, property, and money.”

Days later, Lee repudiated the declaration, and he, or someone close to him, fired his attorney. He sued Olivarez and his former attorney right before his death, alleging both men had taken advantage of the 95-year-old for their monetary benefit.

In July 2022, Stan Lee’s estate settled the case against Olivarez out of court, and in November 2022, a judge dismissed a criminal case against Morgan after a mistrial. He’d been facing charges related to the alleged theft of about $200,000 from Lee.

Reference: Microsoft (June 15, 2023) “Here’s Who Inherited Stan Lee’s Estate After He Died”

Can I Help My Kid Buy a Home?

The Millennial generation has come of age, and Generation Z is following right behind them. Kiplinger’s recent article, “Four Ways Parents Can Help Kids Be First-Time Home Buyers,” discusses how parents can help their children buy their first homes in this landscape of high real estate prices and rising interest rates.

  1. Lend them the money as an intrafamily loan. One strategy is to act as your children’s “bank” and lend them the money. This is known as an intrafamily loan. By serving as their lender, you skip their having to meet banks’ asset and income requirements. However, to avoid gift tax implications, parents should formalize the loan with a promissory note and charge a minimum interest rate called the applicable federal rate (AFR).
  2. Use an intrafamily loan in another way. Another way parents could help by using this intrafamily loan strategy is to provide strategic funding when needed. A borrower on a mortgage who doesn’t put down a 20% down payment would likely need to purchase mortgage insurance, which could be expensive. So, instead of the child incurring that additional fee, the parent could issue an intrafamily note for the gap amount in the down payment. Regarding tax consequences, as the lender of an intrafamily loan, the parent would have to report income on the interest earned on the note.
  3. Give money as a gift. Parents may want to give their children the money toward the home. If so, they can use a gifting strategy called the annual exclusion gifting. Each year, an individual may give up to the annual gift tax exclusion amount to any individual without tax consequences. That amount is currently $17,000 per year and, if left unused, can’t be carried over to the following year. The amount is available per recipient, so if you have more than one child, you could give up to $17,000 yearly to each child. If the parent is married, both spouses together could gift $34,000 per year for each child. This could be used as an outright gift or in the form of loan forgiveness.

Parents may also opt to forgive some of the note’s principal over time by utilizing the balance of the annual exclusion gift yearly or, for a larger amount, the lifetime gift exemption. But unlike the annual exclusion, the lifetime gift exemption is cumulative from year to year and applies to all recipients. The federal lifetime gift exemption is now $12.92 million per person or $25.84 million for a married couple. Still, it’s scheduled to decrease to $5 million (or $10 million for a married coupled), indexed for inflation, starting in 2026.

  1. Co-sign a loan. Another way a parent can help is to act as a guarantor or co-signer on a loan. So, a parent can help a child who may not have established credit and, in some cases, may also help secure better terms on the loan. But if the child fails to make timely payments, the parent could be contractually obligated under the loan terms.

Reference: Kiplinger (June 27, 2023) “Four Ways Parents Can Help Kids Be First-Time Home Buyers”

How to Pay for Hearing Aids

Untreated hearing loss has been linked to a higher level of depression, cognitive decline, dementia, falls, visits to the emergency room, and hospital stays. Despite this, says an article from ncoa Adviser, “Financial Assistance for Hearing Aids: A Complete Guide for Older Adults,” fewer than 15% of adults who need hearing aids use them, and the average person takes nearly nine years to go about getting a pair after being told they have hearing loss.

Part of the reason for the delay is financial. Resources for getting hearing aids vary from state to state, and even county to county, which can be confusing. Here’s how to get started.

First, check with your health insurance company to see what’s covered and ask about additional services. You’re not just buying an appliance. Hearing aids require activation and fitting, and other unexpected out-of-pocket costs may occur. Sometimes the easiest way to verify insurance is to have a hearing aid clinic check into it.

Except in five states—Arkansas, Connecticut, Illinois, New Hampshire, and Rhode Island—insurance providers are not required to cover hearing aids as part of health care for adults. Medicare Parts A and B don’t cover the cost of hearing aids or fitting exams. Still, Medicare Part B covers hearing and balance exams ordered by a doctor and an annual audiology appointment to evaluate hearing loss. Whether or not Medicare Advantage, aka Medicare Part C, provides coverage depends upon the plan.

Medicaid coverage varies by state and plan. Many people with Medicare and Medicaid can sign up with select insurance companies and get coverage at no additional cost, but the coverage varies. Also, the quality of the hearing aids may differ.

Active duty military service members and family members diagnosed with hearing loss meeting the coverage criteria may be eligible to receive hearing aids through a TRICARE-approved provider. For veterans, the VA has hearing aid benefits. They should reach out to their local office or representative. The VA website has information on how to apply for VA hearing health care and find the nearest provider.

Federal employees of the American Federation of Government Employees (AFGE) have access to discounted hearing aids, including a free hearing exam, discounted hearing aids, and aftercare support.

Those with mild to moderate hearing loss can now consider over-the-counter hearing aids. Note that the cost of the device you are buying is a third of the price. The rest of the costs are services, so be sure what services are bundled into the offerings. Instead of relying on online reviews, research trusted sources. You’ll want to clearly understand the return policy, warranty coverage for damage and loss, and customer service.

Reference: ncoa Adviser (July 2, 2023) “Financial Assistance for Hearing Aids: A Complete Guide for Older Adults”

How Much Money to Give Away with Upcoming Tax Changes?

With inflation, the current federal estate tax exemption amount, which you can have when you die without paying federal estate tax, increased to $12.92 million for individuals for 2023. That’s up from $12.06 million in 2022. It will jump to $25.84 million for couples in 2025, up from $24.12 million in 2024. However, those rates sunset at the end of 2025. Without action from Congress, the exemptions will revert to the levels in place before the 2018 Tax Cuts and Jobs Act increased them. That’s about half the amount the exemption has grown to by then due to inflation, says Microsoft’s recent article entitled, “If I have $10 million, how much should I give away while I’m alive?”

Few families have faced federal estate taxes in the last few years, as the IRS has seen about 1200 taxable-estate returns in 2020. However, more families would have to look at the effect of estate taxes if the exemption went back down to $6.5 million per individual. A total of 17 states and the District of Columbia also have their own estate tax and inheritance thresholds. While a number like $6.5 million sounds big, it’s really now just a healthy 401(k) and a nice house in a big city

If you have something like $10 million, and you decide that giving away $3.5 M is the best tax scenario for your estate, you probably aren’t going to write a check. You’ll be looking into trusts and other advanced estate planning techniques that require the help of an experienced estate planning attorney. Those take time, and there’s no way to push them to a December 31, 2025 deadline.

One reason you’d want to give money away while you’re alive is to lower the size of your estate when you die, which would minimize taxes. If you have assets above the exemption limit set by the IRS, the federal tax will likely be 40% on the amount over that limit. There are a number of ways to give away a significant amount of money to lower the value of your estate. People hesitate because most of those options are irrevocable, so you can’t change your mind later.

An issue is using up your exemption by giving away money. If you have $10 million and pass away after the exemption goes down, you’d owe federal estate tax on the $3.5 million difference. If you had given away that $3.5 million before the end of 2025, you’d have a $3 million exemption remaining, and you could have made a wise tax move — at least as long as you stayed under the new threshold. If you gave away more than $6.5 million between 2018 and 2025 — up to the limit during that time — the IRS says you won’t be penalized.

However, if the exemption stays the same after 2026, at nearly $13 million, if you gave away $3.5 million, you’d have essentially $9.5 million left in lifetime exemption. However, be careful not to use up your entire exemption. If you give everything away while living, you won’t have any exemption left. The annual gift-giving limit without losing any of your lifetime exemptions is $17,000 per recipient in 2023.

Reference: Microsoft (Aug. 7, 2023) “If I have $10 million, how much should I give away while I’m alive?”

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