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Author: billybeau Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76418  
Subject: Heirs and Income Taxes Date: 9/11/1999 1:50 AM
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Greetings:
How come heirs do not pay income taxes on a taxable account? Also, if the mandatory minimum required distribution from a traditional IRA was funding an investment for the heirs, would the new investment be put in the heirs name to avoid paying income taxes again on the returns that would be received? I hope this doesn't sound to complicated. Thanks.
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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13850 of 76418
Subject: Re: Heirs and Income Taxes Date: 9/11/1999 9:16 AM
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Billybeau asks:

<<How come heirs do not pay income taxes on a taxable account?>>

Because the taxable account has been funded with after-tax not tax-deferred dollars. Thus, the income taxes in effect have already been paid by the decedent during his/her life. Under existing law any gains in that account don't get taxed because heirs receive that property at market value at the time of death. Unlike the tax deferred contributions and gains in qualified retirement plans, those gains are not considered income in respect of a decendent and therefore are not taxed. Why? Who knows. I guess because the Congress felt like it.

<<Also, if the mandatory minimum required distribution from a traditional IRA was funding an investment for the heirs, would the new investment be put in the heirs name to avoid paying income taxes again on the returns that would be received?>>

No. Just look at it as if you take an MRD because you must. You pay the income taxes due and then invest what's left because you don't need the money. Then you die. The account goes to your heirs not as a gift but as a bequest. Their basis becomes the market value at the time you died. They can sell that day and not be subject to income taxes. OTOH, had you opened that account in their name initially, you made a gift to them (and lost control of the money in your lifetime) at that time. Their basis is whatever you paid for the investment. They then pay tax on any gain over that basis. Suppose they sell that account on the day you die? Instead of getting all the money tax-free, they will owe taxes based on the gain from the date you purchased that investment for them. Why pay those extra taxes or lose control of the cash during your lifetime when you don't have to?

Regards..Pixy

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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13856 of 76418
Subject: Re: Heirs and Income Taxes Date: 9/11/1999 9:43 PM
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<<. Why pay those extra taxes or lose control of the cash during your lifetime when you don't have to?>>

I'm currently reading Suze Orman's book "You've Earned It, Don't Loose It". May give you a few ideas about avoiding taxes and such via trusts. Gave me a little more understanding and something to work on.

JLC

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13857 of 76418
Subject: Re: Heirs and Income Taxes Date: 9/12/1999 5:29 AM
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TMFPixy: "Why pay those extra taxes or lose control of the cash during your lifetime when you don't have to?"

Pixy: Do you not think that your questions ignores the FET and estate planning issues related to lifetime gifts (and getting all future appreciation out of the estate) versus keeping the assets in the estate and receiving the stepped-up basis? IMO, the issue is more complicated than your statement would imply for people who have FET concerns.

Just my $0.02. Regards, JAFO


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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13861 of 76418
Subject: Re: Heirs and Income Taxes Date: 9/12/1999 11:11 AM
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JAFO asks:

<<Do you not think that your questions ignores the FET and estate planning issues related to lifetime gifts (and getting all future appreciation out of the estate) versus keeping the assets in the estate and receiving the stepped-up basis? IMO, the issue is more complicated than your statement would imply for people who have FET concerns.>>

Certainly they could. There are many issues that come into play. Keeping rather than gifting the account could definitely aggravate rather than help for the very wealthy whose estates will be affected by FET. It's literally impossible to say without knowing the specific situation of both the donor and the recipient. OTOH if there's even just a remote possibility a person may need the cash at some point in the future, then almost certainly it makes sense not to gift it away. Who knows for sure until one prforms a detailed analysis germane to the specific circumstances of the case. My response is appropriate for most situations, but not the distinct minority that will have FET concerns. I would hope the latter are aware of that problem and have sought appropriate advice to alleviate the tax man's bite.

Regards..Pixy

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