How bequeathing property before you die gives your kids a tax headache
Dear Liz: My wife and I have purchased a few properties over the years and now we would like to give these properties to our children. I’ve read that the best way to gift properties is to wait until we pass away, which sounds terrible. Is there any way to transfer or gift properties without paying a huge amount of taxes?
Answer: Yes, although you’d likely be shifting the tax bill to your kids.
Currently you have to give away over $13 million in your lifetime to owe gift taxes. But if you transfer the properties to your children during your lifetime, they will also get your tax basis in the properties.
That means if they sell, they’ll owe taxes on the appreciation that’s occurred since you bought the real estate. If you bequeath the properties at your death, by contrast, the properties get an updated value for tax purposes and the appreciation that occurred during your lifetime isn’t taxed.
Gifting the properties may still be the right choice, but consider talking to an estate planning attorney and a tax pro before proceeding.
Dear Liz: I need guidance on asset allocation in retirement. I will retire in June at 65. I’m in good health, so I am planning for 30 more years of life, understanding that it could easily be fewer and might be more. I have a robust government pension and a good chunk of retirement savings. Targeting a 4% withdrawal rate from retirement savings, my post-retirement income will be about the same as my current income, less current savings contributions. The pension will make up about 75% of that income and the savings, about 25%. I could live on the pension alone if it came down to it. At age 70, I’ll get a bump of about 15% of that total income when I start taking Social Security, after accounting for the windfall elimination provision.
My analysis is that I essentially have 75% of my retirement assets allocated to very safe investments, i.e., my pension and future Social Security. I think I should allocate my 401(k) and 457(b) more aggressively than the usual guidance calls for. I’m considering selecting a 2050 or 2055 target date fund.
Am I looking at this correctly?
Answer: You do need guidance, and it should come from a fee-only, fiduciary financial planner hired to provide you with individualized advice. This is, after all, the first and probably only time you’ll retire, while a good advisor has guided many people through this process. The advisor will know the questions to ask and the traps to avoid far better than any novice could.
The advisor may concur that you can take more risk with your investments, given your substantial amount of guaranteed income. A lot will depend on your risk tolerance, of course, but the planner will consider other factors, such as your family situation and your plans for covering long-term care costs.
If you don’t have long-term care insurance, for example, you may want to stockpile more cash or identify assets you could sell to pay for care. If you’re married and your pension would end or diminish at your death, you may want to take less risk with your investments so they can better support your survivor.
There’s no substitute for having another set of expert eyes looking at your plan. So many retirement decisions are irreversible, and you’ll want to get this right.
Dear Liz: Due to capital gains on the sale of a property, my monthly Social Security check is impacted by IRMAA, the income-related monthly adjustment amount for Medicare. Therefore not only do I not receive the recent cost-of-living increase, but my benefit substantially decreased. My question is: After a year will my monthly benefit go back to my most recent benefit, or to the increased amount I would have received without the IRMAA deduction? If the former, it seems like I lose forever.
Answer: You don’t lose forever, fortunately.
You did receive the most recent inflation increase in your Social Security benefit, but it was more than offset by the increase in your Medicare premiums. Medicare premiums are based on your income two years previously, so this year’s IRMAA was based on your tax returns from 2022. If your income went back to normal last year, then the IRMAA surcharge you’re experiencing should disappear next year.
Liz Weston, Certified Financial Planner, is a personal finance columnist for the Los Angeles Times and NerdWallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.