Allison Dubreuil, Wealthway Financial: To kick things off. Tonight, we wanted to go back to the topic that we were talking about on our last show, and that was inheritance and the best assets to inherit or the best assets to leave. It was a really popular topic. I think a lot of listeners are on the receiving end of this massive wealth transfer that’s beginning from the baby boomer generation. Or maybe you, yourself, are preparing your affairs, preparing your estate plan or looking at ways to transfer assets to your heirs. We wanted to dig a little bit deeper into that topic and try to address the most efficient way to try to transfer assets.
Kevin Zywna, Wealthway Financial: So we have some unfinished business from last show. We’ll try to pick up on that, get through some more of the technical aspects of inheritance, different types of assets, best ways to set up those assets so that they transfer efficiently to your heirs in the manner that you intend them to receive. But first we’re going to go to Virginia Beach right now and speak with Clay. Good evening Clay, you’re on Dollars & Common Sense.
Clay, Caller: Yes, I have a quick question on Social Security. Do you guys have a particular formula when you take it at what age? I guess there’s no right or wrong answer depending on how long you live and what you’re going to do in the market. But do you guys have a rule of thumb as far as I really don’t need to take it now or ever but it is COLA indexed.
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Allison Dubreuil, Wealthway Financial: Well, you hit the nail right on the head Clay. If you can tell us exactly how long you’re going to live, we’ll tell you exactly when to claim Social Security. But in the absence of that, no, there’s no hard and fast rule because it varies so much. Depending on your health, your life expectancy, your financial situation, your family dynamics, if you have a spouse, how old your spouse is, what other income sources you have, what other savings you have. But we can talk it through at a high level with you tonight and see if we can point you in the right direction.
Clay, Caller: Well, you know, I’m just trying to maximize it. If you need it, wait as long as possible. If you don’t need it, take it an invest it. I’m blessed, I could take it whenever I want and not really depend on it. My spouse is about seven years younger than me, and I’m 68.
Allison Dubreuil, Wealthway Financial: Okay, so you’re 68 and your spouse is 61. And are you still working?
Clay, Caller: I’m retired from one job, but I run my own business.
Allison Dubreuil, Wealthway Financial: Okay. Does your spouse work?
Clay, Caller: Yes, she flips houses, she does pretty well with that.
Kevin Zywna, Wealthway Financial: Are you paying yourself W2 wages, Clay?
Clay, Caller: No, no. Well, she’s a sole proprietor. The income and the business are hers. But we are not taking W2 wages. We just pay the tax on the on the partnership and take the money as we need it.
Allison Dubreuil, Wealthway Financial: Okay. And do you have any other sort of guaranteed retirement income? Or will you just be living solely on Social Security and your nest egg?
Clay, Caller: I’ve got a PBGC through the airline. Turned it over to the pension fund at the government. I’m going to take that at 70 and let the beneficiary be my daughter. So my only question was, what would be the right time to take the Social Security? I’m thinking at age 70 But not sure.
Allison Dubreuil, Wealthway Financial: Will, your spouse have her own benefit?
Clay, Caller: Yes. She’ll have a pretty good Social Security when she comes of age. She’s got about five more years to Well, I think it’s 66. For me, I’m a couple years past it.
Allison Dubreuil, Wealthway Financial
Yeah, she would probably be age 67. Is her full retirement age then. All right,
Clay, Caller: Well, we’re in good shape, I just didn’t know how you guys quantified the age that you should take it.
Allison Dubreuil, Wealthway Financial: Well, like you pointed out rightly, at the beginning, your life expectancy is a major factor. So if you think you have a high probability of living into your mid-80s, then it typically does make sense to wait and earn those delayed retirement credits, meaning your benefit. Let your benefit grow by 8% per year up until 70. But we really don’t like to make that decision in a vacuum. It’s really important to look at your entire financial situation, and whether or not you would be spending from your portfolio between now and age 70. Because that would be a big factor. If you needed to spend from your portfolio a case could be made for claiming Social Security. But doesn’t sound like that’s going to be the case right now.
Kevin Zywna, Wealthway Financial: We hear a lot of people say they want to take Social Security and then turn around invest it. We tend to think that that is not the best idea. Because each year you delay, Social Security, you’re going to get an 8% increase in that benefit. That’s a solid rate of return, guaranteed. You can’t get 8% guaranteed through other investments. So usually hold off until you need it. Or there’s good reason for wanting it. We have had clients choose to take it early, say, you know, as early as 62. Like Alison said, that prevents them from having to draw from their nest egg or draw down their savings as much or as quickly. And it’s at a period of time when they’re relatively young, healthy and active. So they can use that money to enhance their quality of life for additional travel, or gifting or that type of thing. Instead of waiting, just trying to maximize security benefits over your lifetime. We can tell you from professional experience, most people, once they get to their 90s, aren’t really seen spending a whole lot of money on those life events. It might be other things but not those things that add to quality of life as much. So sometimes it could just be for purely lifestyle reasons too.
Clay, Caller: Yeah, I think you helped me on that answer. That makes a lot of sense. But thank you very much, guys.
Allison Dubreuil, Wealthway Financial: Tonight, we’re talking about inheritance. What are the best assets to inherit? Whether you are on the receiving end (we’ll talk about that), or if you are looking at getting your affairs in order and looking to pass on the legacy, we’ll talk about things you can do to make sure that is smooth. Because we know from professional experience that when someone passes away, and there is inheritance moving from person to person that emotions are obviously heightened. And if there is confusion, or misunderstandings, or maybe some things weren’t communicated out in the open, then it can destroy relationships and families. So being upfront about things and having a plan can help prevent things going awry.
Kevin Zywna, Wealthway Financial: Yeah, we’re seeing less of it nowadays, but there was a time, early on in my career, where we still were dealing with some of the children of the Depression era where you just didn’t talk about money at all with your kids for any reason, under any circumstances. And that lack of communication can cause way more problems, than, whatever you’re concerned about with the communication. I think a lot of it just happened to be a tradition, or I guess just an ingrained feeling among the culture that my kids don’t need to know anything. ‘It’s not their business, it’s our business.’ Well, okay, maybe up to a certain extent. But once your children become adults, especially once they get into their say, 50s, and you’re in your say, 70s, then usually people are mature enough to be able to handle these conversations in the spirit that they’re attended. We do highly recommend that. When you’re putting together an estate plan and planning for inheritance, you at least give your kids the big picture idea of what you’re thinking, what you’re trying to accomplish, and where the important documents are kept. Because we know by sitting with the survivors, when that information isn’t communicated, there’s a big black hole. Not only are they dealing with the grief of loss with their parent, but they are also trying to figure out what mom or dad would have wanted, with this money or with these artifacts.
Allison Dubreuil, Wealthway Financial: Oh, yeah, figurines.
Kevin Zywna, Wealthway Financial: The knickknacks in the house, the sentimental stuff, as well as the financial things. And when there’s not good communication there, that causes problems. We see it firsthand, either among the siblings and or with just the kids themselves trying to figure out, you know, how to be a good steward of this money in the absence of any direction from the parents.
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Allison Dubreuil, Wealthway Financial: We want to talk about the different types of assets that you may find yourself inheriting. The first, the easiest, I guess we can call it the best, that we want to talk about is cash. Cash is king. So if you find that you have inherited some cash, I think the first question everybody asks is: ‘what kind of tax am I going face? Know that if you inherit cash, you are most likely (let’s just call it 99.9% of people who inherit something) are not going to be subject to estate tax. Because you are only subject to estate tax when your estate is over $12 million. So if you’re loved one’s estate is under $12 million, then you’re not looking at a tax issue. And when cash comes to you, that is free and clear and yours to do with what you please.
Kevin Zywna, Wealthway Financial: In the state of Virginia, there is no inheritance tax. The estate tax goes with the decedent, the person who dies, and then the potential inheritance tax would be from somebody who receives transfer of assets via inheritance. In Virginia, there is not an estate tax or an inheritance tax. That is not true for every state don’t die in New Jersey, by the way, yes, we hear stories about that often, lots of people die in Jersey, and their estates get tied up for a long time.
Allison Dubreuil, Wealthway Financial: They pay a lot.
Kevin Zywna, Wealthway Financial: But in Virginia anyway, receiving assets via inheritance is a tax-free event.
Allison Dubreuil, Wealthway Financial: So if you inherit cash, you shouldn’t have to worry about taxes. You should, especially if it’s a significant lump sum, have a plan. Hopefully you’re working with a financial advisor, if not, get yourself aligned with a good trustworthy, Certified Financial Planner, who can help you come up with a plan. Because very quickly, cash can be just whittled away. And before you know it what had been a significant financial leg up can now just vanish in short order.
Kevin Zywna, Wealthway Financial: And while there are certainly worse things to do with newfound inheritance money, we often see people taking big lump sums and paying off their house with it. And we will reiterate what we say here – have been saying for the last decade or more – given the low interest rate environment we’re in, if you have a mortgage that’s in the threes or even low fours, then there’s probably a better use of that money than paying off that low-cost mortgage debt. Once you do that, the equities in your house. And you can’t eat your house, and your house is not that liquid. So there are worse things to do. But they’re also better things to do than paying off your house with a lump sum.
Allison Dubreuil, Wealthway Financial: Right. Think twice about that. Now for people who are planning for their estate plan or their legacy, if you are planning to give cash, I’ll just say a word of caution, be careful about having it spread out among 10 million different accounts. We do see circumstances where mom or dad had multiple bank accounts. Where there was cash in the coffee can in the freezer. I don’t know if that happens nowadays. Oh, it happens. As people age they do start doing things like that. So we always stress consolidate and simplify as much as possible. I know a lot of people are worried about the FDIC limits and making sure they don’t have too much in one bank. There are ways around that by just having slightly different lead titled accounts. But consolidate bank accounts. You don’t need 10 different bank accounts.
Kevin Zywna, Wealthway Financial: Right. And right now, the FDIC insurance limit is up to $250,000 per bank. So for most people that’s going to cover most all of their bank assets. You don’t have to spread it around town. Most people don’t have to spread around town just to make sure you get maximum insurance coverage. And by the way, when was last time a US bank went fully, totally belly up? The probability of risk is exceptionally low. So don’t over complicate your life unnecessarily.
Allison Dubreuil, Wealthway Financial: On those bank accounts, it’s always a good idea to have what they call a “payable on death” or sometimes it’s a “transfer on death” designation. That’s a way to put a beneficiary on your bank account so that it would transfer directly to your intended beneficiary at your passing instead of going through probate. So that’s something you may want to add to your bank accounts.
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Allison Dubreuil, Wealthway Financial: Another asset that’s like cash is life insurance. If you are on the receiving end, if you’re a beneficiary of a life insurance policy that should transfer to you relatively quickly and painlessly. If you go through the steps the insurance company requires, again, that should be tax-free inheritance money to you. They will likely give you the option to keep the money with them in an account and take payments or take a lump sum distribution. We almost always recommend just taking a lump sum payout of life insurance proceeds when you’re the beneficiary.
Kevin Zywna, Wealthway Financial: Life insurance proceeds almost always bypass probate. So again, a very quick and efficient way of transferring money to your beneficiaries. Usually, they just need to show up with a death certificate and fill out a form or two. Usually within a matter of weeks, maybe a month or so you get life insurance proceeds. It is still one of the fastest and easiest ways to generate an inheritance.
Allison Dubreuil, Wealthway Financial: We are talking about inheritance. What are the best assets to inherit if you’re an inheritor or the best assets to leave if you are the giver. We talked about the best asset being cash. Cash is king so you don’t have to worry about too much if you inherit cash and other cash-like assets. Life insurance proceeds will be treated much like cash or any bank accounts that have CDs money market, all that kind of accounts.
Allison Dubreuil, Wealthway Financial: We should mention though, that a common misunderstanding is that anything that has a beneficiary (like a life insurance policy or if you have a beneficiary on your bank account or any other type of account), anything with a beneficiary will pass directly to the beneficiary. It will not follow the instructions you have in your will. So many people think once they draft their will, that is what it is. And sometimes they make updates, but they don’t update their account beneficiaries. And there can be a problem there if you get divorced, and your ex-wife is still the beneficiary, or maybe you had another child or there’s another grandchild, so it’s important to stay on top of these beneficiary designations.
Kevin Zywna, Wealthway Financial: Most people’s 401K plan, or company sponsored retirement plan, so; 403Bs, TSPs, all of those types of accounts, the IRAs that you set up, most all of those are set up with a beneficiary. Whether you remember it or not, whether you know it or not, you have the opportunity to put a beneficiary on there. Which is probably the most efficient distribution method to pass an asset via inheritance. But like Allison was saying, it supersedes anything you say in your will. So if you go to get your estate plan done, and you have instructions in your will that are counter to the way you have set up your beneficiaries, on those accounts, the beneficiary setup governs. Those happen before your estate is settled. So there is a two-step process here. To button up the entire estate plan. make sure your beneficiary designations match or align with your estate plan, the will document and so forth.
Allison Dubreuil, Wealthway Financial: It’s not necessarily just a set it and forget it process. You have to revisit it from time to time.
Allison Dubreuil, Wealthway Financial: So back to asset types, the next asset type we want to talk about is just any type of investment that’s in a regular brokerage account. So that could be stocks, bonds, mutual funds, I guess it could be cash in a brokerage account. But if you inherit a brokerage account, there are a couple of things that you need to know. This is a good asset to inherit because it has an extra tax benefit. When the original owner passes away, you get a step up in cost basis. So that’s just technical mumbo jumbo to say that if mom or dad had been investing in Apple stock for the past 20 years, and they had a huge gain, that would have been taxed to them. So would have been subject to capital gains tax, they could have sold it but they don’t sell it, and it gets passed to you, you now get a reset. So your baseline of where you start is on the day that you inherited that investment. If you sold it right away, you would have no gain. Or if you decide to hang on to it for a long time, then your capital gains starts from that reset point from that baseline of when you inherited it. So that’s a pretty big benefit for investments that have a large built in capital gains.
Kevin Zywna, Wealthway Financial: Right. So it wipes out a lot of the unrealized capital gain in the investment and then when the investment is ultimately sold, it prevents, a large chunk of it being exposed to tax and you having to pay capital gains on the gain – which for most people are about 15% of the profits. So by passing those types of assets in a brokerage account, they enjoy the step up in an cost basis, which then wipes out most if not all, of the capital gain. And when the inheritor goes to sell it, then very little is subject to taxation at that point, typically.
Allison Dubreuil, Wealthway Financial: Two things to focus on if you’ve inherited this. One, you want to make sure you get that step up in basis. You want to make sure that that is properly done, reported, right with whoever’s holding the account.
Kevin Zywna, Wealthway Financial: Yes, that’s a good point. This is something that you have to typically work with a custodian on. Where are the investments held? Aat a bank at a brokerage account at Schwab, Fidelity, Vanguard, Bank of America? Wherever those investments actually are, those are the people who you need to work through this inheritance with (or the executor does) to ensure you receive a proper step up and basis.
Allison Dubreuil, Wealthway Financial: So be aware of that. Know to be on the lookout for that. The other point I wanted to bring up is more psychological/emotional. We often find when people inherit stocks, in particular from loved ones, maybe mom or dad who’ve been investing or who worked for IBM for 20 years and have been investing in IBM stock or whatever the stock is. They oftentimes have a very hard time selling the stock and moving on, even if it’s the right thing for them. Because they feel like keeping the stock is what mom or dad wanted. There are emotional ties. We just caution against that. What’s your quote, Kevin?
Kevin Zywna, Wealthway Financial: Love your spouse. Love your kids. Love your pets. But don’t love your stocks. They won’t love you back. And, and so yes, the point is that there can be emotionally tied to some of this inheritance. Dad would have wanted. e to hold on to IBM. Dad said, ‘never sell IBM stocks son, it made me a lot of money.’ Well, that may have been true in the 70s and 80s. But it’s a different world we live in. And IBM is a different company. And even Bellwether stalwart companies like oh, I don’t know, Sears. They go out of business, the technology passes them by their industry gets disrupted. So what were your parents really leaving you? Were they leaving you the stock in a particular company? Or were they leaving you what that stock could do for you and your family? And once it’s posed like that, most people say, ‘Oh, well, no, I think they really wanted what the value could bring to me and my family. It means that we can put our kids through college without incurring a lot of debt. Or it means that we can make sure that we have one good family vacation a year, and so we develop good family memories or, or whatever.’ That’s what most parents are trying to pass along to their kids through inheritance. It’s what the money can bring, not the specific vehicle that the money is in. Not that specific stock or mutual fund. So don’t get too attached to it.
Allison Dubreuil, Wealthway Financial: And again, if you’re inheriting an asset like this, you want to be working with a financial advisor who can be looking at your entire situation and making sure that the investment is aligned with your goals and fits properly in your portfolio. And if not, how can you redeploy it so that it works best for your goals? Because your goals are probably different than mom and dad’s. If nothing else, your time horizon is obviously different than mom and dad.
Kevin Zywna, Wealthway Financial And one more note about step up in cost basis and saving some taxes, we often see this mistake made. The elderly parents will then put their adult kids on the deed, to their house, deed to the parents property. No, you should let that property pass to your kids via the probate process or via the estate planning process. So that they get a step up in basis. If you put your adult kids on your ownership to your house. You’re essentially negating that technique, that benefit, from happening – of the step up in basis and the lowering of the of the tax value. Plus, there’s all kinds of other complexities. If you have multiple kids, and you only put the oldest one on there – oh, boy. Then they become a joint owner, and then you expose the house to potentially creditors or claims against your kids. And it just gets to be a very complicated situation. So elderly parents should not put their adult children on as an owner on their house or their bank accounts or anything. But we see also the bank accounts a lot of times as well. That’s another mistake that can be corrected through other means more efficiently without all the legal entanglements that come with that.
Allison Dubreuil, Wealthway Financial: You can add someone as an authorized user on your bank account, which would allow them to assist you if you needed help managing your affairs without causing all the other problems. But we typically don’t recommend adding a child as an owner on any of your assets for estate planning purposes. And be careful about leaving something to one kid and just assuming they’ll split it up or asking them to just split it up. Because it’s not that simple. There are ramifications to doing that. There are tax implications. We haven’t even gotten into some of those technicalities yet. So it’s best to do the planning on the front end and not rely on your heirs to figure it out on the back end.
Kevin Zywna, Wealthway Financial: Right now we’re going to go out to Norfolk and speak with John. Good evening, John, you’re on Dollars & Common Sense.
John, Caller: Hey, thanks for taking my call. You guys just mentioned the fact, and I was thinking about doing that, just putting my kids on the houses that they live in. Just leaving it to them when I go. But you recommend that’s not the way to go?
Kevin Zywna, Wealthway Financial: Let’s just clarify here. John, you are the owner of these houses? Are you talking about your house? Or I think you said multiple houses?
John, Caller: Yeah, I have multiple houses. I’ve given one to one son, one to another son. And they’re paid off. And I was just going say, ‘guys I’m going to put you on the deed so that when myself and your mother go, it’s just going to become your house.’ But I wasn’t sure. You were mentioning that it’s probably not the way to go.
Allison Dubreuil, Wealthway Financial: Right, well, if you add your child as an owner, were you thinking they’d be a joint owner with you? Or were you just going to transfer ownership completely to them?
John, Caller: No, no, I was just going to make them a joint owner,
Allison Dubreuil, Wealthway Financial: Joint owner. Okay. So then that would complicate things. I you passed away, then half of the property would get to step up to the current fair market value, but their half would retain that original purchase price value or original cost basis. So they wouldn’t get the full benefit of that step up in basis at your death. They would essentially owe more capital gains. Now, if you sell your primary residence, some of those capital gains are excluded from taxes, but still, that is foregoing a benefit.
Kevin Zywna, Wealthway Financial: And by making them owner with you that is most likely construed as a gift. And given the fact that that gift would be over $15,000 in one calendar year, some gift tax filing (it would there would not be a tax due necessarily) but an informational filing would be required for that type of transaction as well.
John, Caller: So I’d be better off not giving it to him.
Allison Dubreuil, Wealthway Financial: You can add them to a transfer on death to the title of the property, or you can put it in your estate plan. So in your will document, or if you have a trust, you can certainly make sure that it transfers to them. But you wouldn’t necessarily want to add them as a joint owner.
Kevin Zywna, Wealthway Financial: Yeah, if you’re looking for the most favorable tax treatment, John, for the kids, it’s probably to hang on to those properties, and allow them to receive it via inheritance. Now, there could be other reasons why you want to get them on the title or put the houses in their name. Like maybe they’re old enough now, and they’re responsible enough now, and they’re taking care of the property. So it really should be theirs. Well, then you might want to talk about other ways to either gift the property outright to them, or sell the property to them. Maybe at a reduced cost or something like that. But usually, either you should own it, you and your wife should own it completely, or your kids should own it completely. But given the arrangement you described, it’s probably not ideal to co-mingle ownership with you and your kids on these types of properties.
Allison Dubreuil, Wealthway Financial: And this is very complicated for radio, but you can essentially sell the property to them, and then forgive the mortgage payments over the next future years to come as a way of kind of shifting it from you to them.
Kevin Zywna, Wealthway Financial: Yeah, there are creative ways to transfer ownership. It really depends on what’s your objective here. What are you trying to solve? What do you want to do for yourselves, you and your wife? And what do you want to do for the kids? And we probably don’t have time to get into all that here. But just know that you have some options there. And you should just kind of tread carefully and maybe get some professional advice.
John, Caller: Yeah, it sounds like that’s what I should do.
Kevin Zywna, Wealthway Financial: Alright, John, well, thanks for the call. We appreciate it, you know, it illustrates perfectly what we were talking about. How, most often, people think that that’s something that they should do, so that the kids have ease of inheritance of a property. Well, it actually complicates the situation a lot more than if they received it outright to inheritance. Or an even better example was the transfer on death type of designation, which is very similar to what you could do on a bank account or beneficiary designation. So the house can be passed just that easily as well with the right legal documentation in place.
Allison Dubreuil, Wealthway Financial: Right. And that’s why it’s important to be working with not only a financial advisor, which I’ve talked about throughout the show, but also a competent legal adviser, so an estate planning attorney. And I know we’re out of time here.
Allison Dubreuil, Wealthway Financial: I wanted to mention that another really good asset to inherit is a Roth IRA. Because Roth IRAs are tax-free and have been tax-sheltered throughout your lifetime. We don’t have time to go into the details of all that.
But know if you inherit an asset, you should get advice before you do anything like cash it all in and spend it.