Estate Planning

Estate Tax: How Will My Assets Be Taxed When I Die? 

By Jason Newcomer

February 9, 2021

Estate Tax: How Will My Assets Be Taxed When I Die? 


Key Points – Estate Tax: How Will My Assets Be Taxed When I Die?:

  • The Estate Tax today
  • Step-Up in Basis
  • Ordinary Income and Capital Gains Income
  • 5 minute read | 39 minutes to listen

You are probably aware that the government can tax you when you earn income from work, make money on investments, take withdrawals from accounts, and even tax the income you receive when you claim Social Security benefits. Were you aware that the government can also tax your estate (and your beneficiaries) on the assets you own when you die? 

Not only does the federal government have the ability to tax your estate, but some states have also enacted their own estate and inheritance taxes. While the estate tax in its current form has been around for over a century, many people are unfamiliar with how the tax works. They either assume:

  1. The tax only applies to the ultra-wealthy, or
  2. It’s not their problem (after all, they are alive to pay the bill) 

How Will My Assets Be Taxed When I Die?

on America’s Wealth Management Show

Click Here to Read the Transcript

How Will My Assets Be Taxed When I Die?

Links Mentioned in this Episode

Complimentary Consultation Video: The SECURE Act & Your Retirement Video: Is a Will Enough? Ed Slott Podcast: How to Avoid the Biggest Tax Traps

Dean Barber: Thanks very much for joining us here on America’s wealth management show. I’m your host, Dean Barber, along with Bud Kasper, special guest Jason Newcomer, CFP®, author of the article we’re discussing today on asset taxation when you pass on. Jason, welcome to America’s Wealth Management Show. You’ve been on The Guided Retirement Show with me a few times on our podcast, but this is your first debut on America’s Wealth Management Show. Good to have you here.

Bud Kasper: Yes. Welcome.

Bud’s Back on Air

Dean Barber: Bud, of course, I think it’s okay to let some folks know that you were under the weather there for a little bit. You got a touch of the COVID, and your family did, but everybody’s doing well. 

Bud Kasper: Yes. Thank you, Dean. Yeah, it was quite strange, to say the least, and serious at the same time. However, we’ve gotten through this in a relatively short period. However, we’re still doing the show today remotely so that we will go through the entire quarantine period to make sure that no one else catches this horrible disease.

Dean Barber: But your symptoms were fairly benign, right? 

Bud Kasper: They were, and I attribute that, actually, to being somewhat prepared for a COVID transference, meaning that I could get it, and having immune powders and things like that certainly helped through the process.

Why Discuss Taxes When You Die?

Dean Barber: All right. Well, super glad you’re here, glad you’re safe. And Jason, let’s dive into this article. What were you thinking when you wrote this article, Jason? I mean, you bring up so many great points in it, and I don’t think that people fully grasp what happens you inherit money or you’re passing money down to the next generation. 

Jason Newcomer: Many people have misconceptions about how things will be taxed when they either inherit it or pass it down to their beneficiaries, the next generation. We’ve had clients come to us that stand to inherit some wealth and are concerned that 30%, 40% of it will erode due to the estate tax. The current top estate tax rate’s 40%, but the law allows an individual to pass $11.7 million today without paying the estate tax. 

There are Other Taxes at Plan than Just the Estate Tax

For many people, for probably most people out there, it’s something that’s out of mind. But other taxes are at play as well. There are things like capital gains tax and ordinary income tax. So there’s a whole slew of taxes. The government gets pretty creative when trying to figure out how they will get their share of the inheritance?

The Near Elimination of Stretch IRA 

Dean Barber: One of the biggest ones that are relatively new came from the SECURE Act, which was passed at the stroke of midnight back in 2019. It basically eliminated the ability for people to stretch an inherited IRA out over their lifetime. 

It used to be before 2020; if you inherited an IRA, you could stretch the distributions of that IRA out over your life expectancy based on a uniform lifetime table provided by the IRS. So most of the money could stay tax-deferred for the majority of your life. 

But now the SECURE Act changed all that. And even though there’s no estate tax if you’re under the $11.7 million, there’s still the income tax. And that’s the part where people are missing it, right, Jason?

The SECURE Act Made a Huge Impact

Jason Newcomer: That’s right. The SECURE Act’s passing radically changed how inherited retirement accounts will be taxed. Now, for the vast majority of beneficiaries who are not eligible designated beneficiaries, that might include a spouse or a minor child, for example. 

If you’re not part of that group of eligible designated beneficiaries, you’ve now got ten years to withdrawal the inherited IRA, which is subject to federal and applicable state income taxes.

You Need a Strategy to Leave Your IRA 

Bud Kasper: Yeah, the interesting thing about that, Dean, is now we have to develop a whole new strategy around that 10-Year period. Should I pay the tax all at once in the first year of my ten years, or should I do it in the middle of them? In other words, there has to be a strategy. Well, what would predicate that? Income, of course.

So we have additional planning issues that are solvable, but now, in the game, they moved the goalpost on us. Now we have ten years as opposed to a lifetime. And it’s a shame because you and I have said on the program before, Dean, this was a money-grab by Congress.

Learn More About the SECURE Act 

Dean Barber: This was the biggest money-grab that I have ever seen in my 34 years in this industry. The biggest money-grab I have seen, and it is unconscionable. We did a video where we have an attorney, a CPA, myself, and a risk management expert. We did a video on that called The SECURE Act and Your Retirement. 

If you haven’t had a conversation with your estate planning attorney and financial advisor about how the SECURE Act is going to affect you, either as the person who’s passing money down inheriting in the future, you’re missing the boat here.

So watch that video, and then we’d be happy to visit with you with a complimentary consultation, and you can request that complimentary consultation right here on the website. 

Misconceptions About Taxes After Death 

Jason, so you say that your clients’ misconception about how things will be taxed is what caused you to say, “Hey, we need to get something out. We need to write an article on this.” 

Jason Newcomer: Yeah, that’s right. Whether it’s an inheritance of land and questions around how that land will be taxed, or just the fact that you’re inheriting something doesn’t necessarily mean that it will be taxed. It’s all subject to these estate tax exemptions. 

Like I said, currently $11.7 million, so most people don’t have to worry about that estate tax, but it hasn’t always been that high. Back in the late ’90s, early turn of the century here, the exemption was in the range of $675,000, so it hasn’t always been as high as it is today. So while it’s something that many people don’t have to worry about, it is scheduled to go down actually in 2026 with the sunset of the Tax Cuts and Jobs Act.

Dean Barber: Well, we’re going to get into that a whole lot more, and some proposals that are out before Congress right now that would shake the foundation of inheriting money or passing money to the next generation.

More SECURE Act Planning

There is a lot of different planning techniques that are coming around the SECURE Act. One of the things that you can do, and we’ve been having this discussion with clients is, to think about purchasing a life insurance policy that would pay the tax on that IRA over a period of years. 

Or, say you have two spouses; each has a half a million dollars in their IRAs, and one dies. 

Maybe you’ve got an insurance policy on each spouse that’s large enough for that surviving spouse to convert the inherited IRA over to a Roth IRA, therefore earning tax-free income from that. And then that passing tax-free down to the next generation. Bud, what you said earlier is there’s a lot of ways around this. 

Inheriting IRAs and Other Tax-Deferred Assets

It’s complicated most of the time. But there are planning techniques that can help you avoid or reduce the tax burden here. Jason, let’s talk a little bit about the difference between inheriting an IRA and inheriting another tax-deferred asset, which would be a non-qualified or a non-IRA annuity.

Jason Newcomer: Right, people think that if it’s a non-retirement account and I’m inheriting this, I’m going to be subject to maybe a favorable tax rate than the capital gains tax rate. That does not apply to a variable annuity, however.

Dean Barber: Or a fixed annuity or an equity-indexed annuity. Any of the annuities. Right?

Jason Newcomer: Absolutely. Those sorts of inherited accounts are going to be subject to ordinary income tax. So quite a big difference between inheriting, maybe a brokerage account versus an annuity.

Insurance Companies and Annuities

Dean Barber: Now, some of those annuities are specific to the insurance companies who issued the annuities. They have different rules on how the beneficiaries can treat that money. Some allow the beneficiaries to continue the annuity or to do an inherited annuity. Some require all the money to come out of those annuities immediately and be subject to taxation on anything over the original investment in that annuity.

Jason Newcomer: Yeah, that’s right. Those insurance companies will offer to the inheritor of the account options. They get options like whether to take a lump sum or to take a stream of annuity payments. And if it’s a lump sum, for example, if the person that originally purchased the annuity invested $50,000 into the annuity, they die, and now the annuity is worth $100,000. Only that $50,000 of gain will be subject to ordinary income tax for the inheritor of the annuity.

Are You Having These Discussions?

Bud Kasper: I sometimes wonder whether or not the discussion even comes up regarding what the final tax consequences would be on an annuity once the person has passed away. From my experience, I see people come in, and they’ll show me some of these contracts. So, I ask them the simple question, “Were you aware that this could become a taxable gain?” 

“Oh no. It’s tax-deferred.”

“Well, actually-“

Dean Barber: Tax-deferred means it’s going to be deferred into the future, right. 

Step-Up in Basis

So let’s talk about step-up in basis. So the step-up in basis also does not apply to the annuity contracts either. Right Jason?

Jason Newcomer: That’s correct. The step-up in basis is something that’s come under a lot of scrutiny here lately with the new administration. They’ve been looking at maybe eliminating the current rules with the step-up in basis or changing these rules. But here is the way it currently works today. 

Step-Up in Basis Example

Let’s me say that I, with my wife, invest $10,000 in a stock. And that stock grows to a hundred thousand dollars. If we want to sell that stock while one of us is still living, we’re going to have a gain of $90,000. And that gain is going to be subject to the capital gains tax rate.

If I die and my wife sells the stock, she’s still subject to that $90,000 capital gain because she and I purchased it in a joint brokerage account. But if we’re both gone, and our daughter inherits that stock, she turns around and sells it. 

Her basis, her tax basis in that stock, is actually what it’s worth when my wife and I pass away. So her basis becomes the value of the stock, $100,000. She can sell it and avoid paying any tax on the gains. So that’s how the step-up in basis currently works.

Dean Barber: Hey Jason, I want to make sure on one point here. Because if you purchase that stock jointly, you pass on, your wife can get a 50% step-up in basis. So, in other words, they can adjust that basis. So if she wanted to sell part of that stock, later on, she would get your step-up in basis if you purchase the jointly. 

If you purchased it in your name and it was like a transfer on death to her, she would get the step-up in basis at that time. A lot of this has to do with how the accounts are titled when the accounts are set up and when assets are purchased.

Step-Up in Basis and Property

Dean Barber: Homes would be another example of that. You buy a home, or you buy some land or some rental properties or whatever. Something happening right now is the Biden administration would like to eliminate that step-up in basis rule. 

In fact, to take it to such a drastic measure that says, “If you inherit it, you’re going to be taxed on it, whether you sell it or whether you don’t sell it. “

Now that’s like a complete 180. Think about the consequences if that becomes law. Somebody inherits farmland, and it’s immediately taxable. Well, that’s an illiquid asset. What are they going to have to do? They’re going to have to find money from somewhere else to pay those taxes. Either that or they’re going to have to offer that land out at fire-sale prices or liquidate an IRA or liquidate another asset that maybe they don’t want to liquidate just to pay the taxes on that property.

A Sore Subject for Farmers

Bud Kasper: You know, you’re bringing up a subject that is so sore from 20 years ago that is raising itself again. What I mean by this is, those farmers at that particular time saw their property value escalate unbelievably. And they knew that if, in fact, they had passed away and if the stepped-up cost basis wasn’t there, that many times the tax bill would be so onerous that it would wipe the inheritance out.

Dean Barber: Right, well, it would cause the person inheriting the money – It would force them to sell the land to be able to pay the tax.

Bud Kasper: Right. And that might not even cover all the tax. So there were issues associated with that that needed to be addressed. The loss of a stepped-up cost basis, I think, would be devastating to this country. I’m not in favor of it at all.

Are We Expecting Changes Soon?

Dean Barber: I’m not either. Jason, where’s that at, in line of discussion in the administration right now, do you know?

Jason Newcomer: Well, it was all talked about on the campaign trail. There isn’t anything put forth as a bill or to be signed into law through executive order. Nothing’s been happening yet. It has been brought up on several occasions during the campaign trail.

What Else Are People Missing?

Dean Barber: Jason, as we continue to talk about this, what are some other things that you think people are missing when it comes to? How is money going to be taxed when I either inherit it or, or it passes down to the next generation?

Joint Account Ownership Misconceptions

Jason Newcomer: One of the things clients sometimes think and bring up in meetings is, “I will avoid any inheritance tax or income tax if I name my children as joint owners in a brokerage account.” 

Dean Barber: There’s a lot of warning signs going off. You don’t want to do that. And I don’t want to spoil why you don’t want to do it. It’s a very, very dangerous thing to do. And, of course, there could be pros to it in certain circumstances, if it’s a small checking account or something like that, where you want that child to be able to pay some bills. 

But putting them on as a joint owner on a big bank account, a brokerage account, or something like that can have all kinds of repercussions that are generally not favorable at all.

Dean Barber:  Bud, I want to wrap up on being careful about naming your children and or your grandchildren as a co-owner, a joint owner on any of your assets. Thinking that if you do that, it’s going to ease the transfer of those assets then to them when you pass on. This can be a huge mistake for so many reasons. Bud, let’s talk about the first one, then the step-up in basis.

Be Careful Naming Your Children of Grandchildren as Joint Owner on your Assets

1. Annual Gift Exclusion

Dean Barber: Well, if you put them on as a joint owner of that account, obviously now you’ve gifted them money. So you’ve got to file a gift tax return. If that gift exceeds the annual gift exclusion. It doesn’t mean that you’re going to have to pay taxes on it when you gift it to them. But it does mean that you have to file that gift tax return. 

2. Step-Up in Basis in this Scenario

So that’s going to be something that you got to think about. The other thing is that if it is an appreciated asset, say a home or a stock or a brokerage account or land or something like that. Then you’re going to eliminate the ability for them to get a step-up in basis on half of that property if they’re a joint owner. So from a tax perspective, probably not a very good idea.

Bud Kasper: No, it’s not a good idea, period. I can’t think of a circumstance where that would be a good idea, especially since the intention is to get the money into the child’s hands. Why would you not do it in the most tax-efficient way possible? 

This takes us right back to the core of comprehensive financial planning. Of course, of which one of the cornerstones is tax planning. So having an understanding of how you own property, how your investments will necessitate exactly how much of Uncle Sam’s hands are going to get into your pocket.

Using a Trust

Dean Barber: Right. And so, the answer to that riddle of how you own, in that example, if you want somebody to make sure it goes to the next generation in the most tax-efficient manner possible and with the least amount of legal ramifications potential, is to have a trust. Then not just have the trust, but then fund the trust. 

In other words, title the assets in the name of the trust, and a good trust will come along with a durable power of attorney for finances. So that individual can act on your behalf if you become incapacitated and can’t make those decisions independently. So that is the answer. 

Some of you think, well gosh, that’s such a lot of work. And it’s going to be expensive. Well, it’s not expensive when you compare the cost of a trust to the cost of taxes and the court costs and everything else that goes along with that when money passes from one generation to another. The trust is the least expensive way to get that to happen, Bud.

Bud Kasper: It is. And for the direction that you want that money to go to be adhered to, as we walk down life’s highway. And what would it cost Dean? Somewhere between $2,000 and $3,000 to set up that trust?

Learn More About Estate Planning

Dean Barber: Depending upon the complexity of the trust. I mean, you can get up into the $4,000 to $5,000 range. It all depends. One of the things that we do have, though, is we’ve got a great video here on our website. It’s called Is A Will Enough?  Attorney Garrett Griffin covers the basics of estate planning. And the difference between a will and a trust/ It’s on-demand here on our website.

While you’re out there, schedule a complimentary consultationWe can have a conversation about what you’ve got going on, whatever it is, whether it’s about money, retirement, risk management, taxes, or estate planning. We can help you out in all of those areas. 

Another Drawback of Joint Ownership

Dean Barber: So Bud, here’s the other drawback to that joint ownership. For example, let’s say that you wanted to put on one of your sons as joint owner of your account so that you would make sure that they would own that money once you pass on. 

And then one of them happens to get into a car accident and get sued. Or God forbid has something financially goes wrong, and they get sued or have to go through bankruptcy or whatever. Any of those things, they’re going to be able to attach directly to your accounts because that other individual is a joint owner on that account. And I don’t think people understand that.

What About if You Need Assistance? Does Joint Ownership Make Sense?

Bud Kasper: No, they don’t for a lot of reasons. But one of the reasons is we’ve seen people in the past who said, “Well, I want to put my daughter on my account. I don’t have the clarity I had when I was younger. Therefore I need her assistance in doing that.” 

My reply to that is always, “Don’t do that.” You can still get the money to them as efficiently as possible. But as you illustrated, Dean, if something happened to the daughter, let’s say, and there’s a car accident just to make a point here. And now they’re suing daughter. They’re going to look at any account that has her name on it. If that happens to be on mom’s retirement account or whatever the case may be, that will be drawn in for, let’s say, 50% of the asset for a possible money grab.

Back on the Trust

Dean Barber: Right. Again, you can take that and say, “Okay, well, if you want that to happen and you don’t have a very big estate, you can do a transfer on death to the daughter. You can go out and get a durable power of attorney for finances. That daughter can then act on your behalf, pay your bills and do the things that need to be done. And then with the transfer on death titling, that money will transfer to the daughter upon the mother’s death.” In the example that you just gave Bud. But if you’ve got a larger estate, the trust is still the best answer.

Bud Kasper: Yes, it truly is because these are your wishes, your instructions if you will. That after your death, this is how I want my money to be distributed.

Trusts Are for When You’re Alive and When You’re Gone

Dean Barber: Right. The thing about a trust many people don’t understand is that it’s just as much for when you’re alive as it is for when you’ve passed on. Because the worst part that could happen is, if you don’t have a trust that spells out your financial wishes, and then you’ve got someone who’s got durable power of attorney for finances, they can do whatever they want to do. If it’s not spelled out and you can’t tell them anymore, and that’s what the trust is for, for when you’re living.

Bud Kasper: Granted. There’s a lot of times when the trust isn’t necessary, such as IRAs. As long as you have your designated beneficiaries in place, we don’t need to get a trust in there to complicate it. Unless there are complications that the owner feels that trust would be better off representing. 

I just did this, by the way, two days ago. I had a very wealthy client, and she wanted to set up a trust for her two grandsons. So, we sat down there, we talked about the pros and cons associated with it, and concluded that it was best suited for the grandson’s interests that we established these trusts. And we were able to do that.

Your Situation Needs Specific Attention

Dean Barber: Yeah, there you go. Well, it’s just the thing, Bud, when you understand the person’s situation, like a good CFP® should, then you can give the right advice, that’s always in the best interest of the individual. That’s what we do here at Barber Financial Group. 

More Estate Planning Education

A few things you can act on out there right now. We’ve got the SECURE Act and Your Retirement video, and we have the video on Is a Will Enough? We have some pretty detailed discussions on the SECURE Act on The Guided Retirement Show as well, where I interview our good friend Bud, Ed Slott, who is America’s leading IRA expert. He is on episode 31 of The Guided Retirement show. And you can find The Guided Retirement Show on your favorite podcast app or YouTube.

Switching Gears: Discussing Current Market Conditions

Dean Barber:  I want to switch gears, and I want to address the markets right now. And we don’t do this very often, but there’s a handful of times a year where we’ll sit down and discuss what’s going on in the markets. And there’s been some mania happening in the market. You’ve got the Reddit deal with GameStop and the pot stocks and those types of things.

Bud Kasper: Bitcoin.

Dean Barber: Yeah, Bitcoin. We see stocks at elevated levels that we have never before seen in history. There is a steepening of the yield curve. Now, granted that steepening of the yield curve only has the 10-Year Treasury at about 1.39%. So that just shows you how low the short-term interest rates are. But all these things are pointing to a market that is at least fully valued, if not overvalued. 

Dean Barber: Well, Bud, let’s jump in and talk about some of the things you and I see in the market. And let’s just kind of back up for a minute and talk about where we are today. We’re at or near record highs on just about every major indices out there. 

The Reddit Stock Surge

Now some stocks are not as overvalued as other stocks. And then some are just crazy through the moon. You got this whole Reddit phenomenon going on, where they drove that GameStop price up to $473 a share at its high, and here’s a company that’s losing money, and yet here we go, and it’s just going crazy. And it doesn’t make any sense to me.

Bud Kasper: Wouldn’t it be nice to be a little bird on the shoulder of Warren Buffet when that Reddit was exposing, if you will, new investors into a riskier form of investing? I’d much like to hear what his words were at that particular time.

Dean Barber: Well, and then the Reddit trades, they took on the pot stocks and blew those things up for a brief period. But then they came crashing right back down, as did GameStop, off 90%, I think. From its high point. So those things, I think, are more like manipulation in price.

The Fed Interest Rate Policy

We talked here a few weeks ago, Bud, about how with this zero interest rate policy that the Fed has, and even with the steepening of the yield curve, and you’ve got a 10-Year Treasury up to 1.39% now. Get that—a 10-Year Treasury at 1.39%. 

The point is that money is continuing to flow into the market. Last week, we saw record inflows into equity mutual funds and equity ETFs. And, Bud, it takes me back to 1999. I get the same uncomfortable feeling of none of this. It defies all logic. 

You and I know that there are times when, if you’re a fundamental investor, you get frustrated, and it’s as if the fundamentals have just been thrown out the window and don’t matter anymore.

Are We in a Similar Situation as 1999?

Bud Kasper: No, you’re so right. 1999 is the setup point for this comparison, if you will. And just to refresh people’s memories, that was what we referred to as the Dot Com Bubble. The bubble burst in 2000. 

But if you’ll remember, for five years, going back to ’95, ’96, ’97, ’98, and ’99, double-digit returns that we had in the S&P 500, most of that being fueled similar to perhaps what we see with Reddit and things like that, technology. But the difference then and now is that these technology companies were new, they had incredible potential, as we all know, but they didn’t have earnings. 

Yet people were looking past the earnings and saying, “These companies are going to be incredible.” Guess what? They were, whether it was Oracle or Microsoft or Apple or whatever the case may be. In their infancy, they didn’t have the earnings that we fundamentally want to see to support prices, so what did we do? We got a correction. How bad was the correction? Approximately 46% loss in the market in the next three years.

Dean Barber: And that was in the S&P 500. The NASDAQ was far worse. And that’s where most of the tech stocks were being traded at the time.

Looking at Big Tech Then and Now

Bud Kasper: Now, going back to some fundamentals on that, Dean. When you started to see the earnings coming in on these tech companies, they were sound, and they were large. Now you have the baseline for why you should own these companies. And that, of course, has carried us through to the present time. 

Because when you look at the top three companies in the United States, what are we looking at? Apple, Microsoft, Amazon. They’ve all gone through the growth pattern that we all hoped that they would do. And the question is, are they going to continue from this point forward?

Dean Barber: Well, I think there’s no question, Bud, that those significant players in the tech space will be notable players for the foreseeable future.

Bud Kasper: I agree.

Big Tech is Here to Stay, but Are They Properly Valued?

Dean Barber: Probably for the rest of our lifetimes. There’s no question about it. But do they have the earnings to justify the value they’re trading at right now? And the answer is, honestly, they don’t. 

So the markets are looking ahead, and they’re saying, “Well, there are more earnings, and companies are coming out, and they’re exceeding what earnings expectations were. Money’s flowing in.” So this market could continue to be elevated, overvalued, get more overvalued. 

Something’s Gotta Give

One of two things has to happen, though, eventually. Either the value of the market shares has to come down, or the earnings have to reach up to meet what those valuations are today.

Bud Kasper: Yes. But the earnings, as they appreciate, which is what we want to do, they can’t go in, and you can’t have a price increase. In other words, we need to have the price stay the same, let the earnings increase, but I’m afraid we’re not going to see that, Dean. 

What you’ll end up seeing is the greed will keep pulling into the stock market. And therefore, at some point, we’re going to get a correction associated with it. How deep that is, how steep that is, how quick that comes, I don’t have the answers for those.

Recent Corrections Have Been Rapid

Dean Barber: Well, you and I know that the last few corrections that we’ve seen in our markets have been very, very rapid. Go back to the fall and early winter months of 2018. It was a very rapid decline with a very rapid increase. Then we had, of course, the COVID crash in March of last year. 

That was a very rapid decline and then a very rapid recovery. And I think that the reason why I wanted to talk about this, Bud, is prudent risk management is always something that we should be looking at. And this is a time when greed can get the best of you. 

Don’t Let Greed Consume Your Decision Making

When you sit there, looking at your account performance, and you’re saying, “My gosh, look at all this money that I’m making. Why would I take any of those winnings off the table? Because if I take winnings off the table, that’s just going to hurt my future earnings.”

But this is a good time to step back and assess your financial plan. And look at the question that you should be asking at this point, which is what is the least amount of risk that I can take on my investments today and still accomplish my long-term objectives? 

Then consider having that discussion with your financial advisor about reducing the amount of risk in your portfolio. And yes, you may miss a little bit of upside, but if history is any indicator, Bud, of what’s to come, you could be saving your bacon when this market turns around because it doesn’t go up forever.

The Bond Market is Trying to Stabilize

Bud Kasper: Yeah, that’s for sure. And as we look at the bond market, which we approach from the safety perspective, the challenges are there with interest rates as low as they are. The reality is, though, that the US economy is trying to do what? It’s trying to normalize. 

We’re trying to get things back to an even keel again. The problem is the market is appreciated while we’re waiting for this neutrality to come back in. And there is where the risk lies. Because until we get fundamentally back on track in terms of our economic promise, the issue is an ever-present one.

Start a Conversation with Us

Dean Barber: Well, here’s what you need to do, schedule a complimentary consultation here. Let’s do a quick review of what you’ve got going on with your portfolio. Let’s assess that risk out there and determine whether or not you could be taking some risk off the table and preserving some of those winnings that you’ve probably had. 

For that complimentary consultation, we can talk by telephone, virtual meeting, or in person. Don’t forget to watch the videos, read all the articles that we’ve written out there. Get yourself educated. And I know that’s why you’re listening to us here on America’s Wealth Management Show. 

We have been educating those of you here in the Kansas City area now for almost 20 years. We’re coming up on that here next year. Thanks for joining us on America’s Wealth Management Show. I’m Dean Barber, along with Bud Kasper. Everybody be healthy, stay safe, and we’ll see you next week.


The Estate Tax Today

The estate tax is the target of much political debate. In 2021, the estate tax applies to a person’s assets in excess of $11.7 million. With the current estate tax exemption set so high, the vast majority of Americans would not have to be concerned about the federal estate tax. 

However, the current exemption hasn’t always been this high. In fact, in 2001, the exemption was set at just $675,000. The previous administration’s Tax Cuts and Jobs Act set the current estate tax exemption, but it’s set to sunset by 2026, which means the current exemption will be reduced by about 50% at that time. 

State Specific Estate & Inheritance Taxes

In addition to the federal estate tax, several states have enacted their own versions of this tax. In addition, some states have a separate “inheritance tax,” that’s a tax the beneficiary of an estate owes, and not the estate itself. One state, Maryland, actually has both an estate tax and an inheritance tax. 

Estate Tax - Tax Foundation Map

Source: Tax Foundation

What If I Don’t Meet These Estate Tax Criteria?

Even if you live in a state without an inheritance tax or an estate tax, and you are below the federal estate tax exemption level when you die, your beneficiaries may still be liable for some type of tax on the assets you leave them. 

The Step-Up in Basis

Under the current law, when you die and pass on an investment, such as a stock or mutual fund, held in a non-qualified account (not an IRA or a Roth IRA, for example), your beneficiaries are generally eligible for something called a step-up in cost basis. 

Step-Up in Basis Example

Imagine you bought a stock for $10,000, and when you died, you still owned the stock. At the time of your death, the stock is worth $100,000, and your cost basis was the original $10,000. Because you never sold your shares while you were living, you never owed tax on the capital gain. 

When your beneficiary inherits the stock, their new cost basis is “stepped up” to the value of the stock as of the date of your death, or $100,000, and not the original, relatively low, cost basis of $10,000. This means they can sell the stock immediately for its current value of $100,000 and never owe a tax on the gain of $90,000. 

Something to note: The Biden administration has set its sights on this tax rule while on the campaign trail

Disallowing Step-Up in Basis

However, certain circumstances disallow the stepped-up basis. For example, your child is on your stock account as a joint owner instead of a beneficiary. This joint ownership would disqualify your child from receiving a stepped-up cost basis at your death, and their basis would remain the original basis. 

The same concept with a step-up in basis can apply to other types of assets as well, such as farmland or other real property. Also note, under the current tax law, the beneficiary eligible for a step-up cost basis isn’t required to sell the inherited asset. This means they could, in theory, hold the asset until their death and pass it along to their own beneficiaries, thereby deferring the capital gain in perpetuity. 

However, according to Howard Gleckman of the Tax Policy Center, the Biden tax policy proposals could treat the transfer upon death as a “taxable event,” triggering a tax liability for the beneficiaries. That could potentially lead to forcing beneficiaries to sell the inherited assets to afford the tax liability. 

Capital Gains or Ordinary Income

There are also circumstances in which an inherited asset will cause the beneficiary to realize ordinary income and not the favorable capital gains income. Ordinary income can be subject to higher tax rates. 

For example, if you bought a variable annuity outside of a retirement account for, say, $50,000, and then died years later. At the time of your death, the variable annuity contract was worth $100,000. Your beneficiary will generally have the option to receive a lump sum from the insurance company that sold you the annuity, or they can choose a stream of annuity payments. 

Either option they choose will result in the gain on the variable annuity being subject to ordinary income tax rates (and not the favorable capital gains tax rates). The beneficiary’s own tax bracket will determine the tax rate. 

If you leave behind a pre-tax retirement account, such as a 401(k) or a Traditional IRA, any withdrawals your beneficiaries make from those inherited retirement accounts will generally be subject to ordinary income taxes, taxed at their marginal tax rate. 

The SECURE Act

With the passing of the SECURE Act in 2019, many beneficiaries will now have up to a 10-year period of time following the date of inheritance of an IRA to withdrawal the entire account balance, paying ordinary income tax on the entire amount. Beneficiaries can space these withdrawals out over the 10-year period or take them all at once.  

Talk to a Tax Professional

It is generally best to consult with a licensed, qualified tax professional when seeking advice on minimizing taxes on an estate or inheritance legally. You may be able to accomplish tax minimization through proper estate and tax planning. Sometimes it’s necessary to draft legal documents such as trusts to mitigate estate tax, while some circumstances require proper titling of accounts and listing of beneficiaries. While the IRS does allow tax-free gifting of assets from one party to another, the estate tax exemption amount also applies to the lifetime gifting limitations. 

If you’d like to speak with our tax professionals, estate attorneys, or financial planners to see an illustration of how your estate may be subject to a variety of taxes, get in touch with us by scheduling a complimentary consultation here

Jason Newcomer, CFP®, AIF®, EA Financial Planner


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The views expressed represent the opinion of Barber Financial Group an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Barber Financial Group does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.