Author Topic: Managing parent's retirement and possible future inheritance, NJ!  (Read 2277 times)

astvilla

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Mom receives pension of 50K/year from state, no COLA.  Dad also receives pension, much less but something.  Mom has tapped into SS, Dad hasn't yet.  Home pretty much paid off, value around 600K.  I made a thread months before about them and was able to get them to come around.  My dad now is losing 12K betting on oil stocks (losing $$ isn't a new thing for him) and my relatively good (flat) performance helped to cement the idea that indexing is a pretty good, low risk way of investing. 

So now we're talking about avoiding taxes.  Particularly NJ. 

From what someone else on MMM said, NJ is the only state with an inheritance tax and an estate tax.  I'm not sure what estate tax is or if you have to have a certain amount.  A Forbes article said it's at 675K versus federal's 5.34 million.  Needless to say, we're trying to avoid it. 

An idea I had was for them to transfer their 401k assets (which they haven't touched and likely won't for decades) to me and that I would hold onto it until they need it.  If they don't need it, then at least we avoided big taxes.  Thing is, I don't know anything about this type of transfer, if it's even possible, is it practical, how it would affect my taxes or theirs.  Would they have to withdraw and pay higher tax or is there a way to just transfer assets up to a certain amount?  Would it affect my 401K?  Heard 14K is the limit on another thread.

Has anyone done something similar in a high tax state?  Transfer assets that are likely not needed for retirement to children to avoid tax.  And the children can hold onto it for the parents and let the parents dip into it should they ever need it? 

I guess another concern longer term is that if/when I marry, the partner could take half the share which could include the money set aside for parents but moved to me for tax purposes.  Is that considered a risk or is it recommended to mention that in a prenup?  Just in case, no decision is made to move assets to me yet, just wondering.

CommonCents

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Re: Managing parent's retirement and possible future inheritance, NJ!
« Reply #1 on: August 05, 2015, 11:46:21 AM »
My mother-in-law told me about a couple that in an attempt to avoid taxes transferred their house to their daughter and son.  Their son then gambled away his share and the daughter was forced to buy him out so her parents wouldn't lose the house they were living in.  She blames the lawyer who "let them" do it.  Assuming the lawyer disclosed the risk of that approach, I think the parents bear the responsibility for that poor decision.

If it's not clear, no, I wouldn't advise that they transfer anything more to you than they are prepared to consider a full gift to you.  They don't know if you'll spend the money on fancy vacations, lose it in a divorce, decide you'll just keep it for yourself, or be sued by someone and lose it.  If they want to do anything, they can talk to a lawyer about putting it into a trust.  I strongly recommend they (not you) do it.  I'm actually uncomfortable with this conversation because it seems self-serving to me (how can my parent's estate avoid paying large taxes after their death so I get more money?  by giving to me now!).  If they want to avoid taxes and thus giving you (or others...) a large inheritance, they should look into it.

fwiw, my understanding is that all transfers, now or later, are subject to gift tax limits.  (Also note it'll receive stepped up basis if they keep it till death.)

GizmoTX

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Re: Managing parent's retirement and possible future inheritance, NJ!
« Reply #2 on: August 05, 2015, 12:37:19 PM »
OP, you need to start researching estate law & become informed. You will likely find that gift tax on any transfer is equal or more than the death taxes, & you lose the value of stepped up basis. If their estate is large enough, their wills should include a provision for the creation of a pour-over trust so that the estate tax gets deferred until the death of the second to die. This has to be done while both are alive.

I understand not wanting to make the government part of the inheritance but your parents need all their money at their disposal, not yours. This can mean spending down their net worth to provide nursing & health care, & they have to be confident that you will make these decisions for their welfare, not yours.

It's best to assume that you will get nothing, & hope they have enough to take care of their needs themselves. Then you can be pleasantly surprised if there's any residual.

astvilla

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Re: Managing parent's retirement and possible future inheritance, NJ!
« Reply #3 on: August 05, 2015, 03:17:46 PM »
Yeah I'm aware that it sounds selfish.  I wasn't sure of the ways to avoid taxes, especially those in NJ.  The idea was that the assets transferred though under my name would remain separate from my own personal finances.  I don't think they'll ever need the savings (can never say for sure) but there was an idea for me to just hold onto it and if they never needed it, it wouldn't have been taxed (as much).  I'm not familiar with inheritance or estate tax so that's why I asked about 14K limits.  My personal financial goals don't include their retirement.  Anything handed down to me is a bonus, not something I'm counting on and I'm working/saving for FI by myself.

My parents trust me enough to not spend it or be wasteful.  They know I'm a much bigger saver than they are and more conservative with money.  I had thought about the risk of me ever divorcing as a way of losing their hard earned money but didn't think about any lawsuit, that might (unlikely) occur.

I've heard of trusts but I heard those are for people with > 7 figure net worth.  My parents are certainly just a sliver above that.  Most of their net worth comes from their pensions and social security.  I think I also read somewhere in MMM that trusts take quite a bit of money to maintain, they're not exactly free. 

They don't know a lot about taxes or personal finance so they are not even aware of tax implications.  I mentioned in another thread the possibility that I might actually have to pay for their own retirement while struggling to save on my own if they don't have their finances under control and reduce their spending.  So here I am learning for them and explaining what I learn to them.  They are aware now and a little interested but don't have the energy to being proactive with their retirement, that's the nature of pensioners.  Nor are they aware that they still have to save since they don't have COLA and that NJ is incredibly expensive to live in.

Again no decision or preference is made.  Whatever they decide is their choice.  Just trying to help them come up with creative ideas for reducing taxes

MDM

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Re: Managing parent's retirement and possible future inheritance, NJ!
« Reply #4 on: August 05, 2015, 03:22:42 PM »
OP, you need to start researching estate law & become informed.
+1

E.g., in New Jersey "Class A beneficiaries are exempt from the inheritance tax. They include the deceased personís...child".

astvilla

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Re: Managing parent's retirement and possible future inheritance, NJ!
« Reply #5 on: August 05, 2015, 03:32:15 PM »
okay okay, looks like i have some homework to do.  so do my parents. 

on a side note, can my parents even though retired, still contribute to a traditional or Roth IRA?  I remember one time looking at Vanguard and saying they couldn't since they are around 62-64 years old.  Looking at it now, seems like they can but is it common for retirees to still save for retirement?

And I know there's a strategy of traditional IRA slowly converting to Roth IRA over many years.  Is that something my parents can do if they don't need money from their traditional IRA (converted from 401K) and convert to a Roth IRA?  How does one actually "convert?"  Their tax bracket is lower than when they work and they are working towards lowering their expenses.  Right now they aren't touching their retirement accounts, using only pensions and SS for the foreseeable future.

MDM

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Re: Managing parent's retirement and possible future inheritance, NJ!
« Reply #6 on: August 05, 2015, 03:52:06 PM »
on a side note, can my parents even though retired, still contribute to a traditional or Roth IRA?
In short: yes, but they need "earned income" to do so.  Pensions and SS don't count.  See http://www.investopedia.com/university/retirementplans/ira/ira1.asp and similar for more details.

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And I know there's a strategy of traditional IRA slowly converting to Roth IRA over many years.  Is that something my parents can do if they don't need money from their traditional IRA (converted from 401K) and convert to a Roth IRA?
Yes.

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How does one actually "convert?"
Easiest way is to call the broker holding the tIRA and say they want to do this. 

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Their tax bracket is lower than when they work and they are working towards lowering their expenses.  Right now they aren't touching their retirement accounts, using only pensions and SS for the foreseeable future.
The broker can handle the mechanics, but your parents should do some tax projections to decide on the amount.  And of course the investments they want the money to go into - good time to change if there is a reason to do so.

Shane

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Re: Managing parent's retirement and possible future inheritance, NJ!
« Reply #7 on: August 05, 2015, 03:58:17 PM »
okay okay, looks like i have some homework to do.  so do my parents. 

on a side note, can my parents even though retired, still contribute to a traditional or Roth IRA?  I remember one time looking at Vanguard and saying they couldn't since they are around 62-64 years old.  Looking at it now, seems like they can but is it common for retirees to still save for retirement?

If they have earned income, yes. Otherwise, no.


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And I know there's a strategy of traditional IRA slowly converting to Roth IRA over many years.  Is that something my parents can do if they don't need money from their traditional IRA (converted from 401K) and convert to a Roth IRA?  How does one actually "convert?"  Their tax bracket is lower than when they work and they are working towards lowering their expenses.  Right now they aren't touching their retirement accounts, using only pensions and SS for the foreseeable future.

It may be possible for them to convert some of their tax-deferred retirement savings to a Roth every year without paying much more taxes than they are already. You'll need to sit down with their tax returns and play with the numbers to see what effect converting funds to a Roth will have.

It depends on where they have their money now, but usually to convert a Traditional IRA to a Roth you just click a button on the website or sometimes you have to download a form, sign it, and then upload it back to your brokerage's website. If they want to convert money from a 401K to a Roth, probably they'll have to first roll it over into a Traditional IRA, then convert to Roth from there.

Druid

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Re: Managing parent's retirement and possible future inheritance, NJ!
« Reply #8 on: August 09, 2015, 09:08:36 AM »
Your parents don't seem wealthy enough to worry about federal estate taxes sine they are no where near the 5.35 million. A 30 second google search tells me that the estate tax of NJ is for estates over $675,000. Do your parents have assets over this amount? If so one option is to create a real estate LLC and then your parents can gift you interest in the LLC each year in the amount of the federal exempt gift amount. If your parents end up living ten to twenty more years you could end up transferring hundreds of thousand dollars of ownership interest in the house to yourself tax free. Moreover the partnership agreement of the LLC can be designed in away where you won't have the right to sell your interest while there alive. The draw back of this approach is a few grand of attorney fees to create the LLC and the state that you incorporate in may have LLC fees. Oregon is another state with estate taxes.
« Last Edit: August 09, 2015, 09:11:07 AM by Druid »