Tag: beneficiary

Posted on by Jan Roberg

Easiest Tax Quiz Ever!

Important tax quiz, who's your wife, who are your kids?

 

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 by Jan Roberg

Is My Inheritance Taxable?

Young beats the Old

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.)