Avoiding The Inheritance tax & Gift Tax

[rjordan393]

What is the name of your state (only U.S. law)? Pennsylvania.

Hello all,
At present I have 66,000 in a money market account and waiting to see if a market correction occurs before or after the presidential election. My intention is to leave whatever balance is left to three adult nieces and to avoid the gift tax and inheritance tax if that occurs. My brokerage will pay out this money directly to the beneficiarys. This money is not listed in my will.
So what would their tax liability be after my death?
So what would my tax liability be if I gave the money away before my death?
How can I limit or avoid any tax liability?

 

[LdiJ]

What is the name of your state (only U.S. law)? Pennsylvania.

Hello all,
At present I have 66,000 in a money market account and waiting to see if a market correction occurs before or after the presidential election. My intention is to leave whatever balance is left to three adult nieces and to avoid the gift tax and inheritance tax if that occurs. My brokerage will pay out this money directly to the beneficiarys. This money is not listed in my will.
So what would their tax liability be after my death?
So what would my tax liability be if I gave the money away before my death?
How can I limit or avoid any tax liability?

They would get a stepped up basis to fair market value if they actually inherit the money after your death (as beneficiaries). Therefore there would be no tax consequences to them at all.

There would also be no tax consequences to them if you cashed it out prior to that, because the receiver of a gift does not pay tax on the money. However, you would end up paying capital gains tax on any growth, and would also have to file a gift tax return if you any of them more than 14k in any given year.

All in all, unless one of them is in imminent need of money, everybody would be better off if they simply received it as beneficiaries, after you pass away.

 

[AdjunctFL]

They would get a stepped up basis to fair market value if they actually inherit the money after your death (as beneficiaries). Therefore there would be no tax consequences to them at all..

I agree with Ldij but only if the money market account is not an IRA money market, or in an IRA. If it is, there is no stepped up basis to the beneficiaries and they would owe income tax on it in the same manner that you would if you had withdrawn it. In many instances, withdrawals can be spread out over five years.

 

[FlyingRon]

If this pretty much the bulk of your estate you do not have FEDERAL estate or gift taxes to worry about. The exclusion for that is up over $5 Million right now. Gift tax doesn't apply for transfers after you die. Estate tax is likely excluded unless you're worth milions.

Pennsylvania has an inheritance tax. If the heirs are your own children 21 they are exempted otherwise they'll owe a rather substantial (15% I think in this case, inheritance tax). A beneficiary or transfer on death designation does NOT bypass this tax.

This is distinct from the CAPTIAL GAIN discussion above (they don't have to worry about the gain as it does step up with death).

 

[LdiJ]

I agree with Ldij but only if the money market account is not an IRA money market, or in an IRA. If it is, there is no stepped up basis to the beneficiaries and they would owe income tax on it in the same manner that you would if you had withdrawn it. In many instances, withdrawals can be spread out over five years.

Actually, that is incorrect. Those are the old rules. The new rules allow an inherited IRA to be rolled over into an IRA in the name of the individual heir, and that heir can take RMD's based on their expected lifetime. There is no "spread out over 5 years" anymore, although the heir could definitely elect to take it all out in a 5 year period.

However, the OP did not indicate that the money market account is an IRA, but if so, that is an even greater reason to let the beneficiaries inherit.

 

[rjordan393]

Thank for the replies.

But there seems to be a difference of opinion between Ldij and FlyingRon if I am reading them correctly.
One say there's no inheritance tax and the other says there is.
I understand the limit to give cannot be more then 14,000 per year or there's a gift tax on amounts above. But If I cash out the money and give it to my nieces, then there is no inheritance. Is that correct? Then I only have to deal with the gift tax. Better to pay one tax but not both don't you think? I did read Pennsylvania's rules on inheritance and after trying to absorb the jargon, it appears that after my death, the tax would apply.
I can also spread out the cash gift as suggested.

 

[FlyingRon]

Thank for the replies.

But there seems to be a difference of opinion between Ldij and FlyingRon if I am reading them correctly.

This is the way it is:

FEDERAL:

Gifts of less than $14,000 don't even have to be reported. Above that you file a gift tax return, but you do not owe any gift tax nor trigger any estate tax until your lifetime aggregate exceeds $5,400,000. There's no federal inheritance tax. If you get above that amount, the money for the tax comes from the donor (or their estate).

PENNSYLVANIA:

Pennsylvania doesn't have any gift tax provisions. You're free to give things away without reporting it provided it's a true gift and not in exchange for any labor or whatever that would make it income. Pennsylvania has an inheritance tax. This is paid by the recipient (typically out of the inheritance itself). THe rates are as follows:
0 percent on transfers to a surviving spouse or to a parent from a child aged 21 or younger;
4.5 percent on transfers to direct descendants and lineal heirs;
12 percent on transfers to siblings; and
15 percent on transfers to other heirs, except charitable organizations, exempt institutions and government entities exempt from tax.

There is no Pennsylvania estate tax.

That's gifts/inheritance/estate.

Capital gains:

If you give someone something other than cash (such as your investment account), they receive whatever your basis is (roughly what you paid for it). When they sell it, they owe tax on the difference between what they sold it for and what the basis is. If you hold an asset when you die, the basis gets stepped up to its value at the time oif your death. Your heirs only end up being responsbile for the appreciation between the time of your death and when they sell.

While transfer-on-death, beneficiaries, and revocable trusts generally ease the transfer without going through probate, they do not affect the federal estate or the PA inheritance tax. You owe the same regardless of how it was transferred to the "heir."

 

[rjordan393]

Now that's much better, thank you. One last question:
Are my nieces considered lineal? One of them is a grandniece.

 

[curb]

The best way to handle this is to give each of them $14,000 before the end of this year and the remainder on or after January 1st of next year. Absolutely no reporting necessary to anyone and no tax obligations.

 

[AdjunctFL]

One last question:
Are my nieces considered lineal? One of them is a grandniece.

Nieces are not lineal descendants. Lineal descendants are direct blood descendants that would include your children, grandchildren, great-grandchildren, etc.