Is Your Estate Plan Tax-Proof? A Deep Dive into Inheritance Laws

Be one of a kind with Mike's Plan.

It's the One of a Kind Financial Show Daily with your host, Mike Milligan.

Today is Tuesday, September 30th. Without an estate plan, Thanksgiving dinner becomes less about turkey and more about turf wars. I've seen it over and over again in my 26 years history where a patriarch or a matriarch of a family pass away and then the kids Uh, without a really well-written estate plan or the understanding of a really good financial plan, start drawing lines in the sand. Mom or dad wanted me to have this. I am owed this because I took care of mom or dad at the end of life. But there are, there's a lot of questions that you can resolve in your estate plan and with taxes before you pass away. Recently on the One of a Kind Financial Show, Gary and I talked about the SECURE Act and the 10-year rule, the income in respect of decedent, and the step-up basis advantage.

Most families assume they can leave money behind, then it's simple, just divide it equally among the kids. But estate planning isn't just about dividing assets, it's about minimizing the tax burden that comes with them. Now, in this segment, we're going to explore the shadow cost of inheritance and how careful planning can preserve more wealth for your heirs. And we'll also talk about estate planning and estate for taxes. the next generation. Here's the first thing we want to talk about. And this is, I mean, it's relatively new, the SECURE Act and the 10-year rule, because things have changed on this rule, Mike.

Yeah, before 2020, right? So before COVID heirs could stretch IRA distributions over their lifetime. But under the SECURE Act, which, you know, happened in 2020, most non-spouse beneficiaries must pay the account out and down to zero within 10 years. So for a child inheriting $1 million of an IRA account from a parent, that could mean an extra $100,000 or more with growth in taxable income each year, which, Gary, is often during those kids' peak earning years already. They're already in the highest tax bracket they're already going to be in, and now we're going to throw additional income on top of them.

Yeah, exactly.

So this is a huge risk. And it's something that we don't want to burden our heirs with.

Income in respect of a decedent.

Man, IRD. Boy, when I was down at Campbell University in North Carolina in the Trust and Investment Program, boy, this IRD concept was, was drilled into our head. It's one of the lesser-known terms in estate planning. Income in respect—

Yeah, I wasn't familiar with it at all, Mike.

Yeah. Income in respect to decedent. I mean, just, it's, I mean, it's somebody who has died, who still, their estate is still earning income. So this is taxable income that the deceased was entitled to, but has yet to, yet has yet received, like retirement distributions or unpaid wages. And it passes directly to heirs as taxable income.

So even when you die, you're still collecting money. Is that right?

Something along those lines?

Well, you can, right? I mean, you got to think about it, Gary. If we pass away today, right, our company still owes us a little bit of money for the work we did up to today.

Yes.

And if you have a required minimum distribution, I mean, do you think the IRS is really going to let you get away with not taking that distribution? Do you think death is going to, you know, is your reason to not take that RMD? Don't take it that year and watch the IRS come to your estate and say, hey, remember that RMD they should have taken, we have a little penalty because they died on top of it that we're going to make you pay also.

Yeah, there they are standing at your funeral with their hand out, waiting for their money. That's not nice at all. How about this? The step-up basis advantage and its limits.

So for non-retirement assets like real estate or brokerage assets, heirs generally receive a step-up in basis. So imagine you own a stock that's now worth $1,000, but you bought it at $100. and you pass away, it could step up from that $100 to $1,000, the current value, meaning that your heirs may not have to pay a capital gain tax on it. But that can eliminate, and it can eliminate large unrealized gains. But there's always talk of Congress limiting or removing this rule in the future. That's why it's very important to diversify the inheritance strategies that you have instead of just relying solely on the step-up in basis.

Can you explain step-up basis a little bit to our listeners? Because it's somewhat confusing to me, Mike. How does it exactly work?

Yeah. So again, let's say for people in Texas, you bought Exxon stock, and you bought it in 1980, and it's $1 per share. And today, 40-plus years later, it's now trading at $300 per share. If you were to sell it today, you would owe $299. It would be $299 of capital gains. The $1 basis, $300 value.

I see.

You would owe the two, you know, tax on that $299. But when you die, under the current law, the step-up allows you to go from that $1 basis to the current value, the $300. So if it's sold at your death or later, instead of paying tax on that $299, now you wouldn't owe a capital gains tax on that. And that's only applicable, though, if those stocks are in brokerage accounts, non-retirement accounts. Now, retirement accounts have no step-up. There's no basis or step-up in retirement accounts when it comes to getting that step-up.

I see. The show is the One of a Kind Financial Show. I'm Gary Nolan, your consumer advocate. With us each week at this time is Mike Milligan. Let's get you on a calendar all set up with that comprehensive plan, that one-of-a-kind financial plan. 748-1838, 800-748-1838, or text the word IDEAS to 600-700. Using life insurance as a tax shield, Mike.

So life insurance is one of the few tools that allows family to pass on significant sums of money income tax-free. Proceeds can provide heirs the liquidity they need to pay taxes on inherited property or business interest without a fire sale. It's one of the really cool provisions of life insurance. And if you own it, right, it's something that you want to continue to keep. If you don't have it, right, it's just something you want to look at because it is the most tax advantageous thing you can have at retirement.

All right. Couple of minutes left. The emotional and relationship side of inheritance.

Beyond the taxes, poorly structured inheritances can create conflict. Siblings argue over property, unequal tax burdens because of their lifestyles and what they already earn, or surprise bills during probate. So clear planning and communication can prevent financial strain from turning into financial and emotional rifts within your family. And a parent always wants their kids to get along even after they've passed away.

Yeah, exactly. We've heard a lot of conflicts that can happen. Uh, during this situation, and that's, uh, rather unfortunate. All right, Mike, up against the clock again. What do you think?

Well, if you're leaving behind an IRA, property, or a business, your heirs may inherit more tax headaches than wealth. The One of a Kind Financial Plan offers an inheritance tax review as part of our consultations. We'll show you how the SECURE Act, income in respect to decedents, and other tax rules could impact your family. And how to use strategies like Roth conversions, trusts, and insurance to protect your legacy. So, if you want to get a one-of-a-kind financial plan to address this issue, reach out to us because we would love to help you build a one-of-a-kind financial plan for your one-of-a-kind life.

This is your chance to benefit from a personalized retirement income plan and that one-of-a-kind financial plan that Mike was just talking about. Call right now. We have a limited number of availabilities on our calendar this week. And here's the beauty of this whole thing. The consultation is offered at no cost or no obligation. So what are you waiting for? Nothing to lose, everything to gain. It starts by picking up the phone and dialing this number: 800-748-1838. 800-748-1838. Call right now. The folks at One Oak Financial standing by ready for your phone call.

One last message from our compliance team. As a reminder, Mike Milligan, Certified Financial Planner, is an investment advisor representative of Advisory Alpha, LLC, an SEC-registered investment advisor. All opinions expressed by me, Mike, or any podcast guests are solely our opinions and do not reflect the opinions of Advisory Alpha. This recording is for informational purposes only, should not be relied on solely for investment, tax, or legal decisions, and it's in no way intended to communicate or guarantee specific performance or suitability of any security instrument or product as we may have discussed. Investment advisory and financial planning services offered through Advisory Alpha LLC, a registered investment advisor. Insurance products are provided by Ideas by Mike, a licensed agency located in Norfolk, Virginia, and licensed to do business in all 50 states. While tax and legal issues may be discussed in the general course of financial and investment planning, Advisory Alpha does not provide tax or legal services. Please consult with your tax or legal professional prior to making decisions related to these issues. If you want us— an appointment with Ideas by Mike or One Oak Financial, please reach out via our website. This podcast is produced in conjunction with Mike Milligan, LLC.

Be one of a kind with Mike's plan. Innovation, growth, take a stand. Visibility, strategy, take the lead. Transformation's yours, fulfill the need. Mike's got the way to help you rise and stay. Leadership impact you'll find in your one-of-a-kind mind. Be one of a kind, take the flight. Mike's the guide, you'll shine bright.