Tax Issues

Retirement Accounts and Trusts

In this episode, Angela discusses the implications of the SECURE Act and its amendments on retirement accounts, particularly when trusts are named as beneficiaries. She emphasizes the importance of reviewing trusts written before July 2024 to ensure compliance with the IRS's final RMD regulations and to avoid unintended tax consequences. The episode aims to educate listeners on the complexities of tax laws and the need for professional guidance in estate planning.
Key Takeaways 💡
Naming a trust as a beneficiary of a retirement account can be beneficial for several reasons, such as managing inheritances for underage children, protecting assets from spendthrift heirs, creditors, or divorces, and ensuring that assets are distributed according to your wishes even if your heirs predecease their spouses or face financial difficulties.
Updating an estate plan without updating the titling of assets and beneficiary designations can lead to unintended consequences, as retirement accounts are contract property that are paid out per their beneficiary designation; therefore, integrating trust updates with beneficiary designations can simplify estate planning and ensure that assets are distributed according to your wishes.
The IRS released its final RMD regulations on the Secure Act 2.0 of 2022 and Secure Act of 2019 in July 2024, which requires a review of trusts named as beneficiaries of IRAs, and it is important to be aware of these rules to avoid potential tax implications and ensure compliance with the latest regulations.
The SECURE Act eliminated the ability to stretch inherited IRAs over the beneficiary's life expectancy, mandating that the account be fully distributed within 10 years, which can result in significant tax implications for beneficiaries, especially those with high incomes, and there are still planning strategies available to mitigate these tax consequences.
If an IRA is left to an estate, a charity, or certain trusts, the distribution timeframe is reduced to five years, which can significantly increase the tax burden on the beneficiaries, and this highlights the importance of carefully considering beneficiary designations and trust language to avoid unintended tax consequences.
To qualify for the more favorable 10-year distribution rule, a see-through trust must allow the trustee to identify the beneficiary to the IRS, treating them as if they inherited the IRA outright, and the trust must also contain language allowing for the division of subtrusts before the grantor's death and specifically state the percentage of the retirement account allocated to each subtrust.

Thinking About Gifting to Your Children?

This week Angela discusses the complexities and risks involved in gifting significant assets to children, such as land or businesses. She emphasizes the importance of proper planning and professional advice to avoid costly tax consequences and unintended liabilities. The episode focuses particularly on the tax implications of gifting versus inheriting assets and the importance of understanding cost basis.
Key Takeaways 💡
Many parents consider gifting significant assets like land, money, or business interests to their children as they age, but often do so without seeking comprehensive advice, which can lead to costly mistakes. Even when advice is sought, it is frequently from professionals who may not have a holistic understanding of estate and tax planning, resulting in overlooked risks.
Gifting assets without proper planning can expose the family to various risks including lawsuits, creditor claims, divorce risks affecting gifted assets, business liabilities of the recipient, and strained family relationships. Additionally, gifting can unintentionally disinherit grandchildren or transfer assets to unintended parties, such as a new spouse of a child’s widow(er).
One of the most significant and common financial pitfalls of gifting assets is the increase in taxes, particularly due to the transfer of the original cost basis to the recipient. When a gifted asset is sold, the recipient pays capital gains tax based on the original purchase price, which can be much higher than if the asset was inherited.
Cost basis is the original value of an asset for tax purposes, usually the purchase price minus any depreciation taken. When an asset is gifted, the recipient inherits the donor’s cost basis, meaning they may face large capital gains taxes upon sale. In contrast, if the asset is inherited after the donor’s death, the cost basis is stepped up to the asset’s fair market value at the time of death, potentially eliminating capital gains tax if sold immediately.
This difference in cost basis treatment between gifting and inheritance can result in significant tax savings if assets are held until death rather than gifted during life. For example, land purchased decades ago often has a very low cost basis compared to its current market value, so gifting it can trigger large capital gains taxes for the recipient upon sale.
Even if the family does not plan to sell the gifted assets, the cost basis remains important for other reasons, such as depreciation recapture on inherited rental properties or equipment. Inherited assets receive a stepped-up basis, allowing heirs to depreciate the asset anew, which can provide substantial income tax savings over time.
Farmers and ranchers may not realize they can depreciate certain components of their land, such as nutrients, which can offer additional tax benefits. This is an often-overlooked opportunity that can improve cash flow and reduce tax burdens across generations.
Angela stresses the importance of not making gifting decisions alone or without thorough professional guidance. While gifting can be beneficial in some cases, it must be done strategically to avoid unintended tax consequences and other risks. There are creative planning strategies available to mitigate these issues, especially in states like Texas.
The podcast concludes with a reminder that tax laws are complex and constantly changing, and that even accountants and tax professionals may not have complete knowledge of all relevant details. Therefore, a holistic life planning approach involving multiple professionals is essential to protect family wealth and minimize tax liabilities.

Are You Taking Your Financial Supplements? (Rebroadcast)

Recently I was speaking with a client about how important it is to take preventative measures in regard to health - eating right, exercising, and taking the right supplements. It is just as important that we take preventative measures in regard to our finances - planning for the worst-case and best-case scenarios, exercising good financial habits, and revisiting your plan on a regular basis to make necessary changes.

12 Tax-Smart Charitable Giving Strategies (Rebroadcast)

Using an efficient, tax-smart approach to maximize the impact of your charitable giving has never been more important. This week we give you 12 ways to increase your giving power while potentially reducing your taxable income this year and beyond.

Family Support Checklist (Rebroadcast)

As a life planning firm, it is our mission to help you take the essential steps needed to face each of life’s stages with confidence and clarity. We were asked if we could compile a list of the things that need to be addressed on every level when you find it necessary to assume physical, emotional, and financial responsibility for your parents.

Are You Prepared for the Estate Tax Sunset?

We were honored to have tax attorney Kyle Post join us this week as our guest. Kyle discusses some of the changes we may have coming our way after the election in regards to your estate and taxes. You don’t want to miss this.

2024 Election and Taxes

Let’s face it…No one wants to talk politics these days, but facts are facts. We are approaching a presidential election, so politics need to be top of mind. This week we look at the current tax proposal of each candidate. No matter what your political views are, be sure that you get out and vote on election day.

Tax Reform Sunset on the Horizon

Can you hear it? It’s those two, ominous notes from the movie Jaws to let you know we are drawing nearer and nearer to the almost inevitable…the sunset of the Tax Cuts and Jobs Act (TCJA) of 2017. This could mean that higher income taxes and estate taxes are headed your way.

Have You Outgrown Your Advisor?

I believe one of the hardest things to do is find the “right fit” advisor for you and your family. Because of this, I thought I might take a minute to educate you a little about our industry.

Life After Graduation (Rebroadcast)

Graduation is a major step for those important young adults in our life. A parent’s goal is always to see their kids launch successfully and stay successfully launched. How do you do that? Well, we have few ideas for you.
You can read the corresponding article on our website at: https://www.kennedy-financial.com/blog/life-after-graduation-what-should-your-kids-know.

Is Your IRA a Tax Nightmare?

For many Americans, putting money back into a retirement account such as a 401(k) or traditional IRA has been their primary choice to save for retirement. The problem with this is: The IRS is going tax you…either coming or going. Here are some important things you need to consider.

Are You Taking Your Financial Supplements?

Recently I was speaking with a client about how important it is to take preventative measures in regard to health - eating right, exercising, and taking the right supplements. It is just as important that we take preventative measures in regard to our finances - planning for the worst-case and best-case scenarios, exercising good financial habits, and revisiting your plan on a regular basis to make necessary changes.