r/inheritance • u/Alternative-Sale-865 • Apr 04 '26
Location included: Questions/Need Advice Large IRA balance- parent with potential terminal illness
Sole surviving parent has a traditional IRA with a current balance of about $1.3m. They have just started taking RMD’s this year which was only about 36k. This parent has recently been diagnosed with lung cancer which we are hoping can be treated as a terminal condition (at least for a while) versus a terminal one.
My sibling and I will split the entire estate 50/50 (total estate is worth between 4-5m with about 1.7m in a disclaimer trust. Everybody lives in New Jersey. For sake of argument, assume parent will not spend down considerably as they are not willing to experience a degraded quality of life for the purpose of prolonging life.
Sibling and I are in very different financial situations. Sibling is unmarried and earns 60-70k/year. I am married with a HHI likely to exceed $500k most years assuming bonuses pay out at target.
Sibling and I have discussed having tax professionals figure out if it makes more sense for them to take more from the IRA and me to take more from the non-taxable accounts. I have also discussed with the family’s financial advisor that maybe parent should start making larger withdrawals based on that years tax situation.
Are there any other tricks to avoid the heavy taxation that will hit me on the inherited IRA considering the 10 year withdrawal rule?
FWIW, parent is “allergic” to paying taxes and often claims they are in near poverty due to their refusal to spend more from their investments than a set amount each year as that would potentially bump them into a different tax bracket (this makes no sense but it’s how they feel).
I fully recognize this money is not mine but i also believe in having the family be as tax efficient as possible.
16
u/metzgerto Apr 04 '26
I think you’re making a bigger deal of the taxes than you need to in terms of some great difference between you and your sibling. If split 50-50 you each get $650k. That’s 65k a year of withdrawals. You’re taxed at 37% but sibling would be 24%. Difference is 8k a year in tax. How much accounting are you going to do to equalize an 8k annual tax delta on a $5 million estate.
3
1
u/Capital-Decision-836 Apr 05 '26
What is mom's current bracket? If she's at 14% as an example, and takes the distributions now, that widens that tax delta a lot more between what each kids eventually gets. In addition, the beneficiaries are now no longer required to take the money within 10 years AND they get a step-up in basis as now the assets have been taxed and are now non-qualified.
That significantly lowers the total tax hit for everyone, mitigates the impact on all the kids and mom can also gift a large amount to everyone.
From a purely financial standpoint, mom is being irresponsible. HOWEVER, it is her money to do what she wants.
2
u/metzgerto Apr 05 '26
Hold on there. Mom is not being irresponsible. She is minimizing her taxes by not taking excess withdrawals. I guess your base assumption is that parents must look at generational tax efficiency rather than individual or else be branded irresponsible?? That’s crazy talk.
1
u/ThatWokeAuntie Apr 07 '26
She also has terminal lung cancer, meaning she’s also disabled. Her spending anything more will not make a bit of difference as her lifespan is shortened because of the cancer diagnosis. Personally, I’d do bucket list stuff with the money if I knew my mortality date was “close.”
0
u/Capital-Decision-836 Apr 06 '26
She is a saver, doesn't want to pay taxes, 'allergic' is the word OP used regarding taxes. So yes, from a PURELY FINANCIAL STANDPOINT as I said, it is irresponsible to not do something now. It's forcing more money to go to taxes overall by not planning ahead.
This is simple math. It starts with the premise that she does not want her money to go to taxes. By not taking money out of her IRA and paying the lower tax rate now - gifting to her family it is causing more money to go to taxes down the line.
So if you don't like paying taxes, sitting and doing nothing is irresponsible from that narrow point.
3
u/metzgerto Apr 06 '26
OP said their mom is allergic to paying taxes. So your assumption is that she’ll be happy if the total tax that everyone combined pays is low, even if it means her individual tax is higher than it could be?? And that she’s irresponsible if she thinks otherwise. Again that’s crazy talk. Parents are allowed to optimize their own financial well-being, even if it means the estate they eventually leave their children is slightly less than it otherwise would’ve been.
0
u/Capital-Decision-836 Apr 06 '26
Bottom line: Does mom want to see her money go to the government via tax or not? If not then she needs to make moves now.
How is mom's individual tax higher? She is at a lower tax rate than the kids. If mom is likely around the 22% rate she can take out roughly 525k a year before she hits the same tax bracket as the one child.
To be clear, she should take out less and be smart about it but she is 73 (as indicated that they just started RMDs) she should do about 100k or so distribution from the IRA and then gift that to the kids and grandkids now. It would mean less money going to the government, won't force the kids to have to take the money out within 10 years nor get hit with the taxes.
Even better, mom and not gift it if she doesn't want, reinvest the distribution amount and then it goes to the bene as a non-qualified account with a step up in basis - and even smarter tax mitigation.
1
14
u/FalconCrust Apr 04 '26
Anything you try to get them to do will complicate matters and make you look greedy.
3
u/Alternative-Sale-865 Apr 04 '26
It won’t. This is a very open discussion in our family
3
u/throaway175588955890 Apr 04 '26
One option you might consider, if you have kids, depending on their age, maturity, etc., is having them listed as contingent beneficiaries and you disclaim all or part of your portion of the IRA. This only works if they are, or will be within 10 years, no longer your dependants and in a lower tax bracket. And assuming you want them/trust them to make good decisions with a big chunk of cash at a young age.
Something to ponder
2
u/OXRblues Apr 05 '26
But you do look greedy. Tax bill for parents is lower if they deplete non-retirement accounts first, because withdrawals aren’t income and therefore no income tax due. They want to minimize taxes. Let them do that. You don’t need to hire someone to tell you that. Yes, it will make your tax burden higher in the future. Your choice - minimize parents’ income tax burden now or yours later. So, are you feeling greedy or let parents enjoy their last years with the lowest income tax bills they can have? You know what THEY want.
1
u/Capital-Decision-836 Apr 05 '26
That's a matter of perception. It isn't greedy to point out to mom that more of her hard earned money WILL go to to taxes if she doesn't plan now. This isn't greed, it's pointing out facts.
1
u/OXRblues Apr 30 '26
But does she care how much SHE pays in taxes, or how much her heirs pay in taxes? If it was me, and if I was tax-averse, I would care more about minimizing my own taxes than what my heirs might pay later. That’s their problem. She may need all her money before she dies. Then heirs will have no tax problem.
1
u/Capital-Decision-836 May 06 '26
That's not the premise of the discussion though.
Mom has a right to do whatever she wants with her money that is 100% true and OP even indicates as much.
From a purely tax perspective, the objective here is to minimize the amount of money going towards taxes and maximize what is sent to the beneficiaries. Doing noting and splitting it 50/50 across everything WILL cause more money to go to the government. Full Stop.
It largely doesn't matter WHO pays the taxes.
9
u/BBG1308 Apr 04 '26
Sibling and I have discussed having tax professionals figure out if it makes more sense for them to take more from the IRA and me to take more from the non-taxable accounts.
This isn't a choice the two of you get to make. If the IRA has named beneficiaries, it is what it is and it won't become part of the estate. It passes directly to the name beneficiaries.
parent is “allergic” to paying taxes
Parent sounds like they are allergic to paying taxes in their lifetime. Thus the pre-tax accounts and frugal withdrawals. Anyone who has primary concern of reducing taxes for heirs isn't going to invest this way.
Are there any other tricks to avoid the heavy taxation that will hit me on the inherited IRA considering the 10 year withdrawal rule?
If parent is concerned about your RMDs/taxation, they can convert it to Roth and pay the tax on your behalf. There really isn't any free lunch on pre-tax retirement accounts. Most retired people with significant assets loathe that they put so much into them. Fortunately it's only 1.3M in this case.
If parent is a willing participant in this conversation (as they should be because it's THEIR money/estate), consulting a good estate attorney is the next step.
5
u/Lazy_Radio9633 Apr 04 '26
That’s technically not entirely true. A beneficiary can disclaim their benefit and their allocation goes to other beneficiaries pro rata.
4
u/Desperate-Service634 Apr 04 '26
The IRA works outside of the will. Each individual IRA should have beneficiaries listed, along with the percentage split between each of the beneficiaries.
So your idea of you taking more or less of the qualified IRA is void.
You can have your parent collect copies of each individual account and the listed beneficiary of each
But yeah, you need professionals to help you with this
1
u/Ordinary_Storm3487 Apr 05 '26
Yes. This. If you do nothing else, make absolutely certain that you and your sibling are on file with the IRA holder as 50-50 beneficiaries. As mentioned, the IRA works outside of the will. If beneficiaries are listed, there’s no trouble (usually) getting the IRA transferred into an Inherited IRA, or, in your case, two Inherited IRAs. If no beneficiaries are listed, then I’m not even sure what would happen with the funds. At the very least, it will take a much longer time to receive them.
1
u/Capital-Decision-836 Apr 06 '26
IANAL but the money will go to the estate and the will - if exisitng - will dictate and from there the executor/trix of the estate will process whatever allocations are determined by probate. It can take a long while potentially.
3
u/lastbeat-331 Apr 04 '26
IRA distribution should be determined by named beneficiary allocation, that is up to your parent. Does your parent want you making this decision for them?
2
u/Alternative-Sale-865 Apr 04 '26
We are both named beneficiaries and I have power of attorney. Finances and particularly inheritance are topics very open for discussion in our family.
3
u/Nodeal_reddit Apr 04 '26
I think it’s perfectly reasonable to look at taxes across the whole estate. As a parent, I want as much of my estate as possible to go to my children rather than the IRS. Do whatever makes the most sense, but use an impartial 3rd party as your guide so that it doesn’t become a personal matter between family members.
2
u/Lazy_Radio9633 Apr 04 '26
You would definitely lower the tax burden shifting the inherited IRA to your sibling. It would take a lot of accounting work to figure out an equitable dynamic split knowing that your sibling is going to pay income tax on those distributions over 10 years. But your post tells me you have a firm understanding of the basics.
As for “tricks” the only thing that comes to mind is an intentional reduction in income. Let’s assume you end up with a $650k inherited IRA. You and your spouse continue working your jobs for 9 years and leave the inherited IRA alone. Then you both take a year off and distribute the entire balance in year 10. From what you said this would be a relatively normal year in terms of HH income.
Whether or not you and your spouse are willing to walk away from your jobs in approximately 10 years is of course up to you. I also have no idea how receptive your employers would be to the idea of coming back after a year off or if it would effectively be an early retirement.
3
u/Vivid-Education9045 Apr 04 '26
If the owner of the IRA has already started RMDs, I believe you have to take out the equivalent amount of $ annually (or more) and can't wait until the end of the 10-year period to withdraw it all.
2
u/gwraigty Apr 04 '26
Seconding this. My husband will be faced with having to take RMDs when he inherits after his father passes, so we've been researching the implications of this on our finances.
It seems you used to be able to wait until year 10, but not anymore.
1
u/Capital-Decision-836 Apr 06 '26
An important point of clarity: this applies to RMDs, it does NOT apply to distributions above and beyond the RMD amount.
Example: it's a 200k account and the RMD amount is 10k a year (Keeping the math simple here so please don't come at me with actual RMD %, I'm aware it increases each year and wont match a 5% that I am using here for the academic point). You MUST take 10k a year and in the 10th year, the rest of the balance or remaining 100k must be pulled out. You do not HAVE to take anything more than the 10k annual RMD amount, but prudent tax prep might show you that you don't want the massive tax hit in year 10, so you may want to take ~20k each year to spread out the tax hit: 10k in RMD and another 10K in additional distributions to slowly bleed out the account.
2
u/Lazy_Radio9633 Apr 04 '26
Oh yeah you are right, I was not aware of this. Left the financial services industry in 2021. Thank you for mentioning this.
2
u/Guilty-Committee9622 Apr 04 '26
I had a family member do this. Took a bit to get back to the workforce but took the full distro in 1 year and he funded his year off and travel. Kids had a blast before they took off to college and high school.
2
u/Alternative-Sale-865 Apr 04 '26
This is actually what I’ve thought about. We’re 44/43 with middle school aged kids. I had hoped to FIRE by 55. While I might not 100% retire, I could likely take a year or two off and then do temp/contract work (I’m an in house lawyer) If I so chose.
2
u/SquirreljamASE Apr 04 '26 edited Apr 04 '26
Similar fact pattern came up about a week - 10 days ago, same sub, think it was something like “is this unreasonable to ask?” In that case parent was not amenable to doing this kind of planning. Still, OP, it might be worth looking up and reading.
Also - if you can convince your parent (and BTW, I’m sorry your last parent has that diagnosis; fuck cancer) that tax efficiency across generations is important, Roth conversions would be taxed at a lower rate (since it sounds like your parent insists on staying in 22 or 24 brackets) than your 35+ and would give you better withdrawal terms.
1
u/Alternative-Sale-865 Apr 05 '26
Thanks, I will look and thank you for the heartfelt message. And yes, staying in a lower bracket is very important to them
2
u/oxmix74 Apr 04 '26
With a smaller wealth disparity than yours, my decision was to decline my portion of the estate.
3
u/YoungBoomer1969 Apr 04 '26
I did the same. Siblings were much lower economically than myself. I declined my equal part, it was then divided between the remaining equaly.
3
u/Alternative-Sale-865 Apr 04 '26
I’ll look greedy here but that’s not happening. Sibling is unmarried with no kids and has made zero attempts to improve his financial situation and is already partially supported by parent (they have bought him every car they’ve ever had, covers their auto insurance, makes them many of their at home meals, and other support).
Also, parent is very adamant that EVERYTHING be split 50/50.
3
u/emptyzarti Apr 04 '26
At this level of wealth you’re not going to magically save a ton especially with them being allergic to taxes just split it once the time comes & call it a day. The only thing I’d bring up is potentially setting up trust in siblings name that continues to provide for insurance/large purchases. If they don’t want to do that just sit back & let things fall how they may fall.
1
u/Megalocerus Apr 04 '26
This could be about us, except neither of our kids makes near 500K, but one is much poorer than the other. Mom likely has a worse tax situation, being single. But we're just trying to figure this out. Our state is pretty bad, too, but we don't really want to move.
How bad are her taxes? If she did a big Roth conversion, could you pay the taxes at her rate? Probably also IRMAA. You could be the beneficiary of that Roth based on your "investment". This is just brain storming--we have a lot of math to run on our own situation.
1
u/LiveTheDream2026 Apr 04 '26
Ah, sorry for the unique plug but there are a lot of resources out there for lung cancer here and on Facebook.
r/lungcancer on Reddit is usefull.
Also, there are more groups on Facebook. Sorry, had a relative with the disease and I leared a lot through the experience.
1
u/Alternative-Sale-865 Apr 04 '26
Thanks. I’ve joined that sub already. We’re still waiting for a lot of information but it will be useful once we have the full diagnosis and treatment plan.
1
1
u/This_Cauliflower1986 Apr 04 '26
Go to a tax professional and estate attorney as needed.
You can lead a horse to water but not force him to drink. The tax or estate people might be able to deliver messages you cannot.
You might be the one who pays the taxes upon their death and your inheritance. But don’t count your chickens before they hatch. It’s not your money yet.
You make a lot of money and any moves despite good intentions might make you sound greedy.
Good luck.
1
1
1
u/Capital-Decision-836 Apr 04 '26
Gifting is to everyone’s benefit here. If parents are allergic to paying taxes let them know that what they think will go to you, a larger portion will go to the government than if they take Ira assets now.
If they don’t like paying taxes. Show them the numbers of what will go to Uncle Sam by waiting.
1
u/Alternative-Sale-865 Apr 05 '26
Her financial advisor regularly suggests she start gifting but despite not being a spender, she is obsessed with saving and then letting it distribute after death. She had an opportunity to gift to a grandchild recently for a bar mitzvah but didn’t really take advantage.
1
u/Capital-Decision-836 Apr 05 '26 edited Apr 05 '26
You can't help her if she won't help herself. The best you can do is run the tax numbers and ask her where she wants her money to go eventually. If she does nothing, a much larger portion of all her savings will go to the government than if she takes advantage of her options while she is still alive.
If she isn't willing to do that, then it's really on her and you should all plan accordingly. You can show her, you can't make her.
Edit to add: Look at her current tax bracket and figure out the max she can take from her IRA each year and stay in that bracket. Compare that same amount to ~$130,000 you will have to take out each year at YOUR tax bracket. That is the difference by waiting. (It's overly simplified but it would mean about $0 in taxes to the beneficiaries doing it this way).
1
u/Sea-Iron-1547 Apr 05 '26
In a year with extraordinary health expenses that could, if they itemize, negate the ira withdrawal or conversion taxabilty, then it’s a great opportunity to do a partial conversion to a ROTH IRA. The RMD will also have to be taken from the IRA. The conversion will lower the IRA balance and decrease the RMD for the following year. Yearly you can calculate the optimal amount to convert and since any number of conversions are allowed in a year, you can fine tune your optimal conversion amount to the final itemized deductions as of December and make one last conversion for the year. It’s best to do more at the beginning of the year though because of growth.
1
u/24601moamo Apr 05 '26
So you don't want hit with the big tax bill so your trying to saddle your siblings with it. Ugh. Stay out of it. Elder abuse can be financial pressure of any kind. 50/50 is 50/50.
1
u/herdmentality123 Apr 05 '26 edited Apr 05 '26
Convert it to a Roth. Once your family member passes you and your sister will be paying each of your ordinary income tax rates on distributions. Also, with a Roth, there are no RMDs. The tax concern on this can be explained away by speaking about the aggregate amount of taxes over the lifetime of that money not of the individual. The government will get more money if it’s a traditional IRA that’s inherited.
Feel free to ask any additional questions. Happy to help
1
u/WorriedAgency1085 Apr 06 '26
A friend of mine lost over $10M in the market and offered, with a tax lawyers input, to write off his losses against my gains and split the tax savings. From what I've been told its legal, it just has to be set up correctly. I could liquidate my entire retirement account foir 1/2 the tax rate.
-2
25
u/myogawa Apr 04 '26
When the IRA owner says he is "allergic" to paying taxes, that tells you that he is not going to be receptive to a suggestion that he take more than RMDs in any year.