The Money Mustache Community
Learning, Sharing, and Teaching => Taxes => Topic started by: Allen on September 25, 2014, 10:21:21 PM
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My mom's estate attorney has recommended that I (as her general power of attorney) gift myself as much of my mothers assets as possible but to watch out for tax consequences. She has dementia.
Her assets are: $100k equity in house that is on market, 170k in 401k (invested in cash for last 6 years ugh), 110k in variable annuity earning 4% and also pre tax money.
My understanding is there isn't enough to trigger estate or gift taxes but she'll owe income taxes on anything she pulls from the 401k or V.annuinity. Once the house sells her equity should be clear.
Her income is 2100 a month in social security and 1100 a month in a pension. If I figure that right, as a single person her marginal tax bracket is 25%+ for whatever she takes out of the 401k or VA.
Do I do it all at once and pay up to 33%? Do half this year and half next year? How would you recommend best achieving this?
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Why do you need the money in the next two years? The most tax efficient way to do this is to stay under the gift tax limit ($14k for 2014, plus any medical or education expenses) and never pay taxes at all. Don't do early withdrawals so you don't pay penalties. As long as her estate is less than $5million, you won't pay any estate taxes after she passes.
If for some reason you want to transfer more than $14k/year to yourself, at the very least I'd spread the estate out over more than two years. Why not three? Or 5 or 10? Lower annual transfers will incur a lower tax bill.
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Your mother's estate attorney may also be able to draft a care agreement whereby you are paid from her assets for providing her care (assuming you do so), as another tax free way to move assets from her to you. This has to be reasonable and grounded in the reality of your and her situation, of course.
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You may be doing the math wrong - if she is filing single, and isn't a dependent of anyone else (not a given in your case), she gets at minimum a $6200 standard deduction and 3950 personal exemption. So though her gross income is 38,400, her taxable would not be more than $28250 - in the 15% bracket. Add on top of that that not all of the Social Security Income is necessarily taxable, and her taxable income is likely even less. And with dementia, odds are that she has pretty high medical expenses, so she may be able to deduct more than the standard deduction that way. So you might want to fill out a tax return to see where this falls, and run a few scenarios.
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Her assets are: $100k equity in house that is on market, 170k in 401k (invested in cash for last 6 years ugh), 110k in variable annuity earning 4% and also pre tax money.
My understanding is there isn't enough to trigger estate or gift taxes but she'll owe income taxes on anything she pulls from the 401k or V.annuinity. Once the house sells her equity should be clear.
Her income is 2100 a month in social security and 1100 a month in a pension. If I figure that right, as a single person her marginal tax bracket is 25%+ for whatever she takes out of the 401k or VA.
First, sol is correct if this is under $5M you don't need to worry about gift/estate taxes. If she gifts more than $14K in any given year you need to file a gift tax return in her name detailing the gifts. You will not pay taxes on the gifts, they will count against her lifetime exemption of $5M. You will likely have to pay an attorney or CPA $200-500 for tax prep fees unless you want to do it yourself.
Wait until the house sells so you don't have to pay capital gains taxes when you sell it. If she sells it, it will be a tax free gain.
Don't gift the 401K yet. Slowly pull it out into a Roth IRA each year while paying minimal taxes, then gift it from the Roth IRA. She likely has much lower income than you so she will pay less taxes than you.
Annuity - I don't deal with these enough to know the exact rules, but my understanding is the principal portion of the investment is not taxable, but the income stream is. This may not always be the case.
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IANAL - While your mom's total estate is well under $5M*, you would need to file a gift tax form with her annual income tax return if you have her give you or anyone else more than $14,000 in a single year. No actual taxes would be owed, but she (you) would be legally required to do that additional paperwork for her income taxes.
If you stay under $14,000 per person per year, you have no extra paperwork burden.
Also, do you have any plans for your mom to use Medicaid to pay for her end of life expenses? If so, be very careful with the gifting. The federal government is very against anything that looks like hiding her money to transfer medical expenses from her estate to the government.
*The big caveat for the $5M (technically $5,340,000 for 2014) estate tax basic exclusion amount is that STATES can apply death taxes to a smaller amount and some states tax both the estate and the inheritance. If you or your mom live in Pennsylvania for instance, you may not be as safe from estate and inheritance taxes as others.
Thank you for sharing what your mom's estate attorney had to say.