Posted on July 24, 2016 by Jan Roberg

Easiest Tax Quiz Ever!

Here’s an easy Tax Quiz.

1. Are you married? What’s your spouse’s name?

2. Do you have children? What are their names?

I told you this was an easy quiz. Now here’s the next part: same questions, but what would the answers have been three years ago? Any changes? If your answers have changed over the past few years, here’s a tougher question for you; did you change your will? How about your 401(k)? Your insurance policy?

You see, it happens to everyone. Our families change, we have children, we get divorced, we get remarried, people die. If we don’t manually go in and adjust who the beneficiaries are on our bank accounts, retirement plans, and such, then the money that we’ve worked so hard to save and care for our families might go to the wrong people.

It happens all the time. A man dies, and accidentally leaves a million dollar life insurance policy to his ex-wife. Perhaps his IRA goes to his dead brother. Or maybe he’s left his entire estate to his three eldest children completely leaving the youngest out of the will because he forgot to change it when the baby was born.

I’m not just giving you “what ifs”. These are all real examples that happened to real people that I know. The ex-wife had been divorced for five years, the dead brother had been gone for ten years, and the baby was twenty years old when her father passed away.

We all like to think that if we died, our family members would do the honorable thing and share accordingly. Hopefully they will, but it’s still better to put your wishes in writing with the proper documents. Even if your family does have the best intentions, and the highest level of integrity, if you don’t take care of assigning your beneficiaries, your assets will be left for state law to divide.

Let’s say you have no problem with your state laws and you agree with how the state determines the way your assets will be split. Fine. Of course, it could take years for the state to decide how to split your assets once you’re dead and your family could starve to death waiting. Let’s say you die and there’s no determination as to who your beneficiaries are. Generally, it takes about a year to get your assets out of probate, but I once worked on a case that took three years. For those three years, you know who got paid? I got paid for doing the tax returns, the financial manager got paid for handling the money in the account and the lawyers got paid a bundle.

You know who else got paid? The IRS got paid because the income from the assets in the account got taxed at the highest rate because we couldn’t pass any money through to the family. The family got nothing until the estate was closed. All that money eaten away by lawyers, number crunchers, and the IRS– what a waste. Is that really the choice you’d make?

So here’s your little Roberg Tax to do list. Check your life insurance policy. Check your retirement plan. Check your investment and bank accounts. And, check your will. Make sure that the people you have listed as your beneficiaries are the people that you want to receive your money when you die. If you’ve got the wrong people listed, you need to make some changes.

Your family loves you. They’d much rather have you be alive than be your beneficiary. But, because you love them too, make sure you take care of that paperwork.

Posted on June 12, 2016November 30, 2017 by Jan Roberg

Death, Taxes and IRAs

When people talk about “death” taxes, they usually mean “estate” taxes. Now, for 2017, there is no federal estate tax if your estate is under $5,490,000. So for most people, you don’t have to deal with estate tax. But IRAs are a different animal!

An IRA is considered to be taxable income. So – if you die, your beneficiary will have to pay tax on that IRA money. So, maybe you don’t care – since you’ll be dead anyway. But if you do care about leaving a taxable legacy to your heirs, here’s a few things to think about.

1. Roth IRAs are not taxable. Not to you, not to your heirs. (I always like Roth IRAs.)

2. A lot of people sign up for IRAs but they don’t know who the beneficiary should be (or they don’t have all the information they need to complete that part of the paperwork.) When they sign up they just put “estate” down in the beneficiary box. This is usually a bad thing. What happens is that your heirs wind up having to file a form 1041, an Estate and Trust tax return. Now, if you Google “estate tax” you’ll probably find all the tax rates on estates – and you’ll read the tax brackets for if you have over $5,450,000. (And that’s a form 706 – it’s a different animal.)

The 1041 form for income tax on estates and trusts is for the income earned by the estate – which includes your IRA income. The first $2,550 is taxed at 15%, the next bracket up to $6,000 is taxed at 25%, the next bracket up to $9,150 is at 28%, then up to $12,500 is at 33%, and anything over that is $39.6%. It doesn’t take a whole lot of money to kick your IRA income into the top tax bracket! Just to give you a comparison – a single person won’t hit the 39.6% tax bracket until he or she reaches $418,400 in taxable income.

So what does this mean? Well, if your heirs aren’t rich, they’re going to be better off if they inherit your IRA directly from you instead of from your estate.

3. If your goal is to leave a legacy to your children – life insurance is better than an IRA. (I can’t tell you how much I hate sounding like a life insurance salesman but it’s true.) Your IRA is your retirement account – it’s supposed to be money for you to spend during your retirement. In a perfect world, you spend it all before you die. (And of course, have enough to enjoy a long and happy retirement.) Life insurance provides your loved ones with tax free cash after you die.

This is really a personal decision on your part. Do you want to leave something for the kids or not? For some people that’s a major priority, for others, not at all. It’s your choice. But not matter what you decide, be sure to work with your financial advisor to make sure your heirs are properly listed as beneficiaries to your taxable retirement accounts.

Posted on September 14, 2012May 31, 2016 by Jan Roberg

Is My Inheritance Taxable?

Photo by Matt Lowden on Flickr.com

Good question. I bet you’re looking for a yes or no answer though and it’s not quite that easy.

Everybody talks about the “death tax” but for most people, there’s no such thing. Generally, if you inherit money, you do not pay tax on it. There are a couple of states that tax inheritances, but the federal government does not.

But… (You were waiting for the ‘but’ weren’t you?) While you won’t be taxed on the inheritance itself, you can be taxed on the income of a deceased person’s estate. The easiest way to explain this is with an example.

Let’s say your Uncle Bob dies and leaves you $10,000 in his will. Cool. You get $10,000 cash, and that’s it. There’s no inheritance tax. He just left you a dollar amount; nothing to it but cash.

But what if instead of just leaving you cash, your Uncle Bob left you half of his estate? Suppose he leaves half of everything he owns to you and the other half to your sister. Let’s say he has $50,000 cash in the bank.

It might take some time for the estate to settle and for you and your sister to get what’s coming to you. During the time after your uncle’s death and before you settled the estate, the estate (that is, the stuff your uncle used to own) made some money. Interest was paid on the bank account. While you won’t pay tax on the $25,000 cash you get, you will pay tax on the interest that the cash earned while it was part of the estate. It will be “passed through” to you as the beneficiary.

That’s the part that’s really confusing to most people. You read the IRS books that say inherited money isn’t taxable—it isn’t. But the income that money earns while it’s sitting in the estate is.

The taxable income will be reported on a document called a K1. If you’ve never seen one before, it’s a little intimidating. But if you’re doing your own taxes, you just input the numbers from the K1 into the boxes in the software and you’re going to be okay.

So, if the $50,000 in the bank earned $1,000 in interest and you’re supposed to get half of the estate, then you’ll pay tax on $500 (your share of the interest earned) and you’ll get $25,500. (Half of the $50,000 plus half of the interest earned.)

Now, realize that I’ve really simplified this. Usually there’s more than just a bank account. There will be stocks, a house, maybe even a business. But the idea is basically the same: you pay tax on the income that the estate earns, but you don’t pay tax on the value of the actual stuff in the estate. (If we’re looking at estates that are worth over $5 million dollars, referred to as the $5 million estate-tax exemption—that’s another story, but that’s not what I’m talking about today.)

Posted on March 16, 2011May 31, 2016 by Jan Roberg

Leaving Your Estate to Your Dog

Photo by Blaise Machin

I don’t often get requests for what to post in my blog, but I was actually asked to write this one.

You can leave all of your money to your dog when you die. Now I don’t recommend it, but it’s possible. Maybe you heard about Leona Helmsley, the wealthy hotel maven who left her money to her dog in her will. Yes it’s true. And, it’s actually more common than you might expect.

But is leaving your money to your dog the right thing for you? Probably not, and here’s why. First, a dog doesn’t have a social security number. (I’m reading this back to myself and it sounds like an episode of Mr Roger’s Neighborhood; “Dogs don’t have social security numbers!” But it’s true.) Without a social security number, dogs can’t file a regular tax return. And you’re not getting a social security number for your dog– so don’t even try to go there.

If you want to leave your money to your dog, you have to set up a trust. My dog’s name is Lady so if I wanted to set up a trust for her I’d probably call it the “Lady Browser Inheritance Trust.” Two points about naming the trust: first, it should properly identify the trust. If you just call it “dog trust” there could be dozens of other dog trusts out there and there could be some confusion. It will have an identification number, of course, but a unique name is helpful to the people who will be working on it after you’re gone. Second: don’t give it a terribly stupid name. Remember that someone is going to have to manage your trust after you’re dead. You might have no problem calling your dog “Kitchikookoo-picky-poo-poo” but the person managing the estate might.

You will fund the trust by making it the beneficiary of your estate. For example: Let’s say that you name the trust, “Duke Dog Trust.” Then, you would make “Duke Dog Trust” the beneficiary of your bank and financial accounts. If you’re really serious about doing this, you need to think which accounts should go to your dog versus which accounts go elsewhere. You also need to think through who your secondary beneficiary will be should your dog die before you do.

Setting up the trust and funding it isn’t all that hard. Really you just have the legal expense of setting up the trust. What’s more difficult is figuring out the care program for your dog. Anyone who’s serious about leaving their estate to their dog is really more concerned that their pet is well cared for than anything else. You’ll have to include specific care instructions outlining feeding, grooming, exercise, veterinary care, etc. and who is going to be responsible for that care and how it’s paid for.

Once again, that brings me back to my original observation—you probably don’t want to leave your money to your dog. Why? The taxes! Dogs can’t really inherit money, everything goes into the trust. Trusts are usually set up as “pass through” entities. Usually a trust is set up so that people get money from it. For example: Grandparents setting up a trust for a grandchild. The money in the trust earns interest, the interest is “passed through” to the grandchild and the grandchild pays taxes on the interest at his income tax rate. (10, 15, 25, 28 or 33 percent) Income in a trust is taxed at 35%. You don’t get a deduction for the expense of caring for the dog. About the only deduction you get is paying your attorney and accountant fees, the rest is all taxable. Leaving your money to humans is much more tax effective. First, if you have less than $5 million dollars, your heirs can inherit the money tax free. And your estate can be settled within about year. Income from your estate can be passed through to your heirs at their personal income tax rate instead of the estate tax rate. People you love will get more of your money instead of it going to lawyers, accountants, and taxes. Leaving money to a trust for a dog is the worst possible tax strategy for your estate. Now if it’s the only option available to you, then so be it. But if you can arrange to have your pet cared for after your death and leave your money to a human, that’s that best situation from a tax standpoint.