It’s fair - it’s like when someone leaves money to a child, but has it in trust until they are x years old. My friend’s daughter got some at 21, gets more at 25, 30 and 35.
My dad updated his paper to give the grand kids money but my sister and I convinced him that they have to be 35. Two kids are already but mine aren’t close and while one kid might be ok, the other isn’t ready.
So these things are common - so doing what you’re suggesting isn’t a bad idea.
H’s parents gave his sister a large sum of money over the years when she was struggling. They wrote it into the will as an early disbursement of her half of the inheritance she & H will split. Frankly, it never occurred to any of the family members that the amount of H’s inheritance should be adjusted in any way simply because his S got some of her money early. Do you really feel the need to get that much into the weeds?
Thanks @ct1417 and @bluebayou. There are a lot of unknowns for me.
Let the total value of the 401k be. A . If I let the 401K simply grown, I will have A(1+r)^n a tthe end of n years. Then the estate will pay Federal and state income tax (assume 42%). Theestate will also owe MA estate tax. Assume the rate is 10%. So the estate will pay 52% in tax and retain .48*A(1+r)^n.
If instead I converted it all at once to Roth, I would pay the max tax rate of 42% (ignore the 4% MA surcharge). Assume I’d have .58A left. At the end of n years, my estate would have .58A(1+r)^n. Then I would only pay estate tax of 10% of the estate value. So I would retain .9*.58(1+r)^n or .522(1+r)^n.
If I have this correct, my estate would have 4.22% more in assets if I did the conversion. And the withdrawal schedule is much more favorable with a Roth (I think a Roth beneficiary can take a balloon payment at the end of 10 years.) Note that the difference will be a little larger because I assume the same 10%average tax rate for both scenarios and yet the tax rate may well be a little lower for the smaller estate value if I rolled over the entire 401k.
I think MA does not have either a gift tax or an inheritance tax.
I’m going to assume that both of my kids will remain married. Incomes are harder to predict in an AI world, but both couples will likely be in a pretty high tax bracket.
I think there is also something called a Spousal Lifetime Access Trust (SLAT) that can reduce the estate tax.
I mean, here’s the deal …
If you put that $95k into that calculator I linked above, it turns into more than $1M by the time we die with a 7% rate of return (FA has us living until 99, which isn’t unreasonable considering my parents lived into their 90s). That feels like too big of a discrepancy to just take the $95k off the bottom line. But that’s us. I mean, if Kid Two comes back and says don’t worry about it, then that’s fine with me, but I wouldn’t go into it expecting him to be so generous.
It is far too late to be trying to answer this question that is way beyond my limited abilities–especially when you start throwing math equations in there!!-- but the first question I have is why would the estate pay federal and state income tax?
I thought that Fed estate tax is due on amounts over $15 million*, and MA estate tax is due on estates over $2 million. You referenced MA estate tax of 10%, but that suggests only $3.5 million. I don’t want you to quote your dollar figures, but want to make sure I understand what you are explaining here. If you are saying the estate will have to pay Fed estate taxes, then I think MA will collect 16% on the amount over $ 2 million?
*I guess $30 million in your case b/c Fed spousal exemption is portable, but I am fairly sure MA does not allow that.
Random other thoughts–not answering your question but just throwing more questions at you–ha! Would Roth conversions require you to start paying NIIT on investment income? You’re probably already paying NIIT, so not relevant. Would the timing of the Roth conversion trigger IRMAA? If you processed the entire conversion one tax year, it would only add shy of $14K for Med B&D for you and your spouse, but you might want to plug that into your formula if applicable.
I think you are correct about the balloon payment at the end of 10 years with the inherited Roth. No taxes due on the Roth monies, including the appreciation that will occur during the 10 years after your death.
As you can tell from my rambling, I really don’t know anything about estate taxes, or trusts, but they are on the to do list!
I agree with this! If other kid doesn’t need the money now and has a FA, just gift each kid the $19k if you can, and take it year by year. Kid 1 learns and kid 2 adds to his/her portfolio. And you Gift them tax free.
Excellent points.
We are hoping to get most of our IRA money rolled over into the Roth before RMDs kick in so taxes wouldn’t be much of an issue there. We have more than 10 years left to do those rollovers. We keep chipping away at the IRA, but the market keeps bumping up the balance, a good problem to have.
My state has no estate or inheritance taxes, which is one reason for us to stay put.
Our tax rate is lower than both our kids’ right now. That could change if the single kid gets married.
Thanks for getting me to sort this out, @CT1417. It does make my head hurt a bit.
With respect to your questions, the top marginal estate tax rate is 16% but the effective tax rate on the estate would be less than that. I just guessed 10% to make calculations easier. The effective tax rate on a $3.5 M estate would be lower than 10%.
Either the heirs or the estate pay the estate tax. I was not differentiating. I’m pretty much ignoring Fed estate tax as there are are ways to engineer around that. You are right. The $2 million exemption for MA estate tax is not portable, but you can yous bypass trusts to get a similar effect, I think.
Had not thought about IRMAA but I’m already paying. Not clear if it gets worse but that seems pretty small in the grand scheme of things.
Had not thought about NIIT, but here is what Gemini says:
What Income Is (and Is Not) Subject to NIIT?
The tax does not apply to your total income. It targets specific investment vehicles: [1, 2, 3]
 What Counts as Investment Income |
 What Is EXCLUDED from NIIT |
|---|---|
| Capital gains from selling stocks, bonds, or crypto | Wages, salaries, and corporate bonuses |
| Taxable interest and dividends | Qualified retirement withdrawals (Roth/Traditional 401ks & IRAs) |
| Rental property profits and royalties | Tax-exempt municipal bond interest |
| Passive business income (businesses you don’t actively run) | Active business profits (from your primary job or business) |
| Income from non-qualified annuities | Excluded primary home sale gains (up to $250k single / $500k joint) |
I’m not sure what you mean, but unless you exceed the millions $$ in lifetime gifts, you can gift any amount in a year…and there is no tax implication for anyone.
I do believe you need to file a form if you give more than whatever the amount is, but there shouldn’t be any financial implications.
It’s the 709 form.
Unless you pull the money out of a taxable account like your 401K to gift to the child. You would pay taxes on the 401K withdrawal.
True.
My suggestion to the OP is to gift the same amount to each child at the same time. I O W if you are giving to one before you die, don’t wait to leave an inheritance in that amount to the other.
Agreed. As @noready and I posted above, if financially doable for @Youdon_tsay ,why not simply gift an equal amount to both kids now, and let them manage it as they please. You can give year by year and see how it goes.
I forgot about the $99K credit that serves to bring the effective rate down.
I was not differentiating either between the estate or the heirs because it’s the same outcome. I don’t know how to engineer around the federal estate tax, and don’t know anything about bypass trusts, so I trust you on those topics. Are those the old A/B trusts that MA residents had used when the state was taxing back to the first dollar once the estate value exceeded $1 million?
The figure I quoted in my first response last night is the maximum that you would pay. $14K is the max surcharge, but if you are already paying some IRMAA surcharge, the differential will be less than that, and it would only be levied in the year that you do the Roth conversion.
I know that NIIT does not apply to Roth conversions, but if you would not otherwise be paying NIIT b/c your MAGI is below $250K, the Roth conversion would push your MAGI above $250K and therefore subject your investment income to the additional 3.8% surcharge.
As I mentioned, this is all beyond my pay grade, so I’m just offering a couple of inputs to consider. I’m thinking that those advisors you employ could offer suggestions.
Kid Two has access to a lot of financial resources and already has a FA and doesn’t “need” the money right now.
Kid One doesn’t “need” the money either, in that he covers his expenses and has a great credit score and finances his Roth and HSA, but there’s not a lot of extra left. I think money now for him would provide some psychic relief. Financial gifts simply would have a greater effect on his life. All his work is 1099 work. And as I wrote, the money would come with a session with a FA. I know that’s something he would appreciate.
So, yeah, we know that it would be easier to just gift them the same amount now, but different kids have different needs. Before we do anything we would talk to Kid Two and see how he feels about it.
Yes @CT1417 thanks. The advisors are where I am heading, but I like to think this through somewhat before I talk to them. that way I can ask educated questions. I will also review with one of my AI buddies.
I think the bypass trusts are like the A/B trusts (maybe they are the same, there are also something called credit shelter trusts). We are in the process of redoing our estate plan and I think there are going to be SLATs as well. I honestly do not know if I pay NIIT but I assume I do.
There are enough moving pieces that AI should be pretty helpful in thinking this through – if given enough context.
We started working with an estate attorney last year and we learned giving gifts to family is more complicated than we thought. In the past when we gifted we gave equally. This year we wanted to gift a property we own to one of our kids with the understanding that the others would get an equal gift in the future or after we die. The attorney explained that due to the gift having the advantage to grow in value over time it wasn’t as simple as stating a dollar amount. There is a formula that calculates down the line what the equivalent amount would be. I didn’t listen as well as I probably should have as I’m not recalling who sets that formula.
The attorney also said the best advice he can give is to when possible to give to all the kids the same amount at the same time.
Also a couple can each gift to their kids allowing more than the $19,000 to be given in a year without filing the gift tax return.
Two parents gifting their married kid who also has 2 kids of their own: $19k times 8! No gift tax forms to fill out. That’s a good chunk for a downpayment on a house. If timed such that gifting happens in December and January of the following year, the kid’s family can start house shopping in the spring with a healthy $19k times 16 chunk towards the new house! That’s assuming the annual giving amount stays the same, $19k.
Can’t edit my post above, so add here: just make sure the checks written in December are cashed before January 1st of the next year, otherwise, it will be considered a January gift (or whenever the checks are cashed).
Thanks. I didn’t realize that.