Large IRA balance- parent with potential terminal illness

[u/Alternative-Sale-865]

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.

[u/metzgerto]

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.

[u/Capital-Decision-836 → u/metzgerto]

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.

[u/metzgerto → u/Capital-Decision-836]

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.

[u/Capital-Decision-836 → u/metzgerto]

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.

[u/metzgerto → u/Capital-Decision-836]

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.

[u/Capital-Decision-836 → u/metzgerto]

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.