Inheritance question/need help/advice

[Linderbee]

My oldest daughter's fiance's mom passed away in late January. Apparently. she was very well-to-do but suffered from early dementia and somehow her sisters managed to get power of attorney over her & her finances while she was still alive.

The fiance' *should* be getting a decent amount of money (she is certain her dad had a trust for her that had $250k in it, as well as the division of the mom's assets, with the mom's other two daughters).

Slight backstory: fiance' went through a bout of severe drug use, and her aunts HATE her (I've been present for some of their conversations and I actually got in the one aunt's face and had to shout her down). Her aunts are raging alcoholics, so it's just ironic to me that they hold so much disdain for their niece, but whatever.

Fiance' is certain she's going to get screwed; aunt is executor of the will/trust/whatever.

In the meanwhile, though, she received a letter from the Pennsylvania Board of Education stating that her share of her mom's retirement is $67k. Aunts can't touch it or keep it from her, so that's good. Question is, how should she take the money? She has 3 options: 1) All of it in one payment, 2) Monthly payments of her choosing, or 3) put it directly into an IRA of her own.

I doubt she'll go with 3), because they are broke as a joke and could REALLY use the money, even if it's just to procure a car. Does anyone know the tax ramifications of a straight up payout? The notice said it would be subject to an immediate 20% in taxes, but what about when she files next year?

Any thoughts or advice/suggestions would be extremely appreciated as they can't afford a financial adviser.

Aunts have been telling her it could easily be 6 months before she sees any of the rest of her inheritance, if she gets anything at all (yes, I know it's illegal but they can't afford an attorney. We'll cross that bridge when/if we come to it).

TIA!

 

[elindholm]

The cutoff for the federal estate tax is so high that almost no one has to worry about it. Maybe some states have their own estate taxes, but I'd be amazed if they are as high as 20%. So the 20% that you're hearing probably has to do with the type of retirement fund it is. It's a tax on the withdrawal of the funds that would have been paid by either the mom or her heirs. If it's a pension run by the state or something similar, you should be able to find someone (with the state or employer) to confirm this without too much hassle.

If this tax is being figured according to the capital gains rate, there could be some advantage to taking the money over several years, to stay in a lower income bracket. But the capital gains tax rate for most people is 15%, and for the lowest brackets it's zero. So even if they take out 20% right away, some of that should be coming back once taxes are filed at the end of the year.

https://www.fool.com/retirement/2018/12/09/long-term-capital-gains-tax-rates-in-2019.aspx

Look at the cutoff between the 0% and 15% brackets, and if the timing of how the money comes out keeps her in the lower one, that's probably worth it. If it's going to be 15% regardless, then she might as well take it all at once, as long as she can be trusted to hoard it responsibly.

She shouldn't need a financial advisor for this, but she'll probably want an accountant when it comes time to file.

The six-month delay from the aunts isn't necessarily a cause for alarm. Even simple estates can take forever to close properly, and funds may not be distributed until all expenses are accounted for. But you will need a way to stay in the loop, because the process doesn't happen on its own.

 

[AZCB34]

Obviously the best thing would be to roll it into an IRA. Any distribution us treated as ordinary income for tax purposes I would assume. You have to be cautious because $67k couldpotentially push them into a different tax bracket.

One option, if allowed, would be to take a partial distribution (for a vehicle) and room the rest into an IRA.

The concern with the IRA is if they are as "broke" as you say they are, they would probably draw money out incurring a10% penalty.

This is a moment for them...a moment to get their financial lives in order.

 

[Russ Smith]

Yeah I am with elindholm I'm surprised there's any tax implications at all. I inherited money from my mom when she died and I had no tax implications neither for the IRA, or the mobile home I inherited and sold. I was told that even if I had sold it at a large gain(I didn't) it would have just been ordinary income tax on the "profit" and that was from what she paid for it to what I got.

In this case the inheritance isn't "profit" from selling anything so I don't see why there would be income tax. I'm not an expert and I have no idea in Pennsylvania but I think federal wise I doubt there's very little tax implications.

IF it's in an IRA she can inherit the IRA, I did with my mom. I ahve to take mandatory annual withdrawals because my mom was old enough to have to do so, but the withdrawals are based on MY age not hers so not as much.

Seems surprising to me

 

[AZCB34]

Yeah I am with elindholm I'm surprised there's any tax implications at all. I inherited money from my mom when she died and I had no tax implications neither for the IRA, or the mobile home I inherited and sold. I was told that even if I had sold it at a large gain(I didn't) it would have just been ordinary income tax on the "profit" and that was from what she paid for it to what I got.

In this case the inheritance isn't "profit" from selling anything so I don't see why there would be income tax. I'm not an expert and I have no idea in Pennsylvania but I think federal wise I doubt there's very little tax implications.

IF it's in an IRA she can inherit the IRA, I did with my mom. I ahve to take mandatory annual withdrawals because my mom was old enough to have to do so, but the withdrawals are based on MY age not hers so not as much.

Seems surprising to me

The retirement we are speaking about isn't in an IRA...yet. Anyone who takes money out of a retirement account will pay taxes unless it is Roth. This isn't an inheritance tax we are talking about just ordinary income.

 

[Brian in Mesa]

fiance

Hmmm.

Your fiance is the man you plan to marry; your fiancee is the woman you plan to marry. (with or without accent marks )

Not sure how these carry over to a same-sex pairing since the word origins (French derived from Latin) are masculine and feminine.

Anyway, money problems like this are good ones to have because regardless of which way it is handled they will be better off financially.

 

[MadCardDisease]

Question is, how should she take the money? She has 3 options: 1) All of it in one payment, 2) Monthly payments of her choosing, or 3) put it directly into an IRA of her own.

I would throw it all in a retirement account. That would supercharge her retirement account instantly. I'm not sure how old she is but the younger she is the more she will see at retirement.

If she averaged a 7% return on that $67K initial deposit, then in 30 years her account would be worth more than $500K

At 7% return and 40 years she would have made a cool $1M to retire with from just that initial $67K.


Compound interest is your friend!

 

[LVG]

My oldest daughter's fiance's mom passed away in late January. Apparently. she was very well-to-do but suffered from early dementia and somehow her sisters managed to get power of attorney over her & her finances while she was still alive.

The fiance' *should* be getting a decent amount of money (she is certain her dad had a trust for her that had $250k in it, as well as the division of the mom's assets, with the mom's other two daughters).

Slight backstory: fiance' went through a bout of severe drug use, and her aunts HATE her (I've been present for some of their conversations and I actually got in the one aunt's face and had to shout her down). Her aunts are raging alcoholics, so it's just ironic to me that they hold so much disdain for their niece, but whatever.

Fiance' is certain she's going to get screwed; aunt is executor of the will/trust/whatever.

In the meanwhile, though, she received a letter from the Pennsylvania Board of Education stating that her share of her mom's retirement is $67k. Aunts can't touch it or keep it from her, so that's good. Question is, how should she take the money? She has 3 options: 1) All of it in one payment, 2) Monthly payments of her choosing, or 3) put it directly into an IRA of her own.

I doubt she'll go with 3), because they are broke as a joke and could REALLY use the money, even if it's just to procure a car. Does anyone know the tax ramifications of a straight up payout? The notice said it would be subject to an immediate 20% in taxes, but what about when she files next year?

Any thoughts or advice/suggestions would be extremely appreciated as they can't afford a financial adviser.

Aunts have been telling her it could easily be 6 months before she sees any of the rest of her inheritance, if she gets anything at all (yes, I know it's illegal but they can't afford an attorney. We'll cross that bridge when/if we come to it).

TIA!

The only bug I would put in their ears is that if they do get these funds, they should hire a probate litigation attorney to at least poke their nose around the estate.

You didn't say if there was a will. If there's no will, then a portion or the entire estate may pass to the fiancee. Just hiring an attorney to do a little legwork may yield a large result.

[Edit] if there was a testamentary trust, and she's named as a beneficiary, she most likely has a right to an accounting.