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Investor’s column: Here’s how to avoid expensive mistakes with your inheritance

I’ve found clients usually name their spouse as primary beneficiary and their children — if they’re still talking — as 50/50 or equal contingent successor beneficiaries.

Some make bad mistakes by listing their estate as a primary beneficiary on IRA, 401K or rollover IRA applications.

Careless contingent beneficiary selection often leads to a financial disaster. Florida’s laws for intestacy, dying without a will, trigger wasteful spending on high-priced attorneys for probate, requiring attorney and executor fees, and more taxes.

IRAs controlled by an estate must go through probate before heirs receive IRA assets. Estate taxes can also increase unnecessarily when an estate takes distributions from an IRA, too.

If the decedent hasn’t taken required minimum distributions (RMDs), funds must be distributed by the estate over five years. Once the estate of a decedent who took distributions closes, beneficiaries can defer taxes by setting-up inherited IRAs in their names.

Estate tax brackets usually run higher than individual tax rates. Spouses who inherit IRAs from wedded mates can defer taxes by rolling into their IRAs. Non-spouse IRAs can create inherited IRAs that may allow more significant tax-deferred growth, stretch distributions over their life expectancy.

However, distributions are required every year if the decedent hadn’t started taking distributions, based on the beneficiary’s age. Leaving funds to the estate, though, must be distributed over five years, likely causing added taxes.

That’s why I think it’s prudent to give more thought to your successor or contingent beneficiaries.

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Jim Germer is a CPA and financial adviser at Cetera Financial Specialists, LLC, in Bradenton.

Jeng Chiu, an attorney and certified financial planner with Delaware Life, says it may make sense giving different assets to different kids. Some children live in high tax states such as California or New York, and others live in states such as Florida, where there’s no income tax. California state income taxes might exceed 13% for wealthy taxpayers.

Also, each of your kids might have different financial circumstances. For example, one child might be a divorced elementary school teacher earning, perhaps, $55,000 a year, in a 12% tax bracket. Her brother, on the other hand, might be an affluent heart surgeon earning bigger money.

Now consider the tax effects if the doctor, for example, is in a 37% tax bracket. Should they each inherit half of a $300,000 IRA, the teacher might pay $18,000 in federal tax, and the physician would owe about $55,500.

So here the teacher who takes distributions of $300,000, in a 12% bracket yearly, would pay $36,000 in tax. The heirs in this example would likely save a whopping $37,500 in federal income tax.

So what about the good doctor? Maybe give him shares of stock that received a stepped-up basis. Stocks get valued at fair market value on the date of death or an alternative six months later valuation date, not original cost.

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If the son gets $300,000 in appreciated stock instead, he doesn’t have to pay tax on the IRA. There’s no tax when selling the stock at his new basis. If he sells the stock after it appreciates, he gets to pay tax at his capital gains at a lower tax rate of 20%.

Should the teacher inherit a modest amount of appreciated stock, she might be able to take capital gains tax at some rates of zero or 15%. She wins big.

Less money goes to the IRS and more goes to heirs with proper contingent beneficiary planning. So consider beneficiaries better served by taking a series of small distributions over several years. Lump sums may lead to substantial tax bills.

Jim Germer is a CPA and financial adviser at Cetera Financial Specialists, LLC, member FINRA/SIPC, located at 100 Third Ave. W., Suite 130, in Bradenton. Call 941-746-5600 or email

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