Personal Finances

Clear Pathways to Pass Along Your Wealth to Your Heirs

Personal Finances by Mo Vidwans

I cannot think of anyone who is not thinking of passing on wealth to their next generation (heirs) after they are gone, even if the next generation may not need it because they usually do better than the past generation. There are many ways it can be done, and I am listing here a few common options one should consider.

IRAs and 401Ks These investment accounts grow tax-free (until money is withdrawn) while the owner is alive, and they actually continue to grow tax-free after the beneficiaries inherit them. Certain heirs, such as spouses and people with disabilities can hold these accounts over their lifetime and pay taxes only when they withdraw. But watch out. The law changed recently and most heirs not in the above category will have to empty the accounts within 10 years after they inherit them; this is all courtesy of the new SECURE 1.0 law passed by Congress under Trump Presidency. There are still some choices that can be made here. Depending upon who has a higher tax bracket, you or the inheritor, a decision must be made as to who should be paying the taxes. Whoever has the lower bracket would be the right one.

Taxable Accounts Currently, heirs get a great tax break on the accounts that have greatly appreciated over time because of the ‘stepup’ in value that the law allows. What it means is that if your stocks, mutual funds, ETFs or other properties have appreciated in value and you still own them at the time of passing, their cost goes up to the value of that investment on the date of death and hence there are no capital gains to pay taxes on if they are disposed, say, on that same day. Capital gains taxes are certainly reduced considerably if you sell afterwards. Let us take a quick example. You bought a stock long time ago at $300 and it is worth $1,000 at the time of passing. If the stock is sold on the day of passing there will be no capital gains taxes to be paid; if you had sold it the day before, you will be paying taxes on $700 of gains. This is a great advantage for those who have followed long-term investment strategy. Now there are under currents in Congress of passing another law which will eliminate this advantage. It is always a good idea to communicate to your congressman and senators as to how you feel about these things; and communicate often, our lawmakers tend to have short memory.

Life Insurance It is a great instrument to pass-on estate to your heirs when it is done right. Let’s say that you have bought life insurance on your life, Term or Whole Life, and you are not the owner or the beneficiary of that insurance. It is critical to note that you must not be the owner or the beneficiary of that policy because you do not wish to bring all that money back into your estate; if that happens then the whole purpose of having a life insurance policy is defeated. If the paperwork is done right the money will go to the designated beneficiary tax-free and thus the heirs get the benefit.

529K & Educational Expenses Paying for someone’s education is a great way to pass on some of your wealth to others, especially the next generation. I have to say that there is some intrinsic pleasure when you see some good results stemming from such application of your funds. The pleasure is immediate when you see someone you have great interest in, like your grandchild or someone close, graduating from college and doing well afterwards. You can contribute to their 529K plans, anybody’s plans for that matter, up to a limit per year. Or you can pay directly to the Educational Institute for the person’s education and there is no limit on it. The check must be paid directly to the Institution and not to the intermediary like the student or the parents.

Medical Expenses Very similar to educational expenses, you can also pay the medical expenses of anyone, not just your own relatives. This is a great way of reducing your own estate or passing on part of it to the next generation. Like before, just assure yourself that the checks are made to the Medical Institution directly and not to the patient or someone else.

General Probably it is known to many that there is unlimited transfer of funds between spouses. It is also possible to