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Got a Will? Power of Attorney? Living Will? You’re Almost Done with Your Estate Planning

“Many parents fail to get their financial affairs in order, neglecting to take care of such things as wills, living wills and powers of attorney. However, even those who think they’ve covered all of their bases, often leave one of the most important tasks undone.”

By failing to have a conversation with adult children about the money they are leaving behind to their children, many who think their estate plans are completed, leave their kids with a real lack of information. Having those conversations is part of passing an estate on to the next generation, says Kiplinger in the article “5 Financial Challenges Your Kids Will Face With Your Estate.”

Many parents don’t have the answers themselves to these questions, so they have to come up to speed first before they can talk about these matters with their kids. Here are five things to pass on:

Taxes and IRAs. Chances are your children won’t know that they will be paying taxes on IRA withdrawals. They will be likely to take a “stretch” IRA option and leave funds in the IRA for as long as possible, while taking RMDs (Required Minimum Distributions) based on their life expectancy. The stretch option is smart. However, a child who wants a new car or a down payment for a house, may not understand the impact of taxes on their inherited IRA. Make sure they see the numbers and how much of a bite taxes will take.

Can they do an IRA rollover? A spouse can rollover an inherited IRA into their own IRA or 401(k) but a non-spouse beneficiary cannot. If they do, the entire amount of the IRA becomes taxable income. There are no second chances. Make sure that the IRA custodian who will administer the IRA for your heirs, automatically takes care of the RMDs, so they don’t have to worry about it. If they don’t take the RMDs, they’ll have to pay a hefty tax.

What taxes are due on an inherited annuity? Inherited annuities come with a variety of limitations and taxes. The insurance company will issue a 1099 for any untaxed growth to the heir. This must be included as gross income for that tax year. If the recipient isn’t expecting it or doesn’t know it’s a tax, it could come as an expensive surprise.

What is a “step-up in basis”? This applies to stocks, bonds and real estate. The value of the asset on the day you die, is the cost basis to your heir. It is not what you paid for it originally. Let’s say you bought a second home for $300,000 and it appreciates to half a million dollars in value. If your child sells the house for more than $500,000—its value on the day of your death—any capital gains taxes will be calculated on the $500,000—the “stepped-up basis”—and not the $300,000 original cost or basis.

Who will have the details? Set up a family meeting with your estate planning attorney and your adult children at a time that works for all of you. They’ll be more comfortable in the days and weeks after your passing, if they know who they’ll be working with to settle your estate.

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