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After about eight years of progressing dementia, my mother-in-law died last month. Fortunately, she had enough assets, plus a daughter nearby, to ensure high-quality care. We had assumed that her care would substantially deplete those assets, but apparently it did not. I am working to sort out our tax situation for 2020. Following is what I think I understand:

* The inheritance is mostly individual stocks in taxable accounts, which are being transferred to DH in-kind with the stepped-up basis recorded as of the date of death. This part is straight-forward tax-wise.

* A small portion will be a traditional IRA which is being transferred to an inherited IRA for DH -- he has 10 years to fully deplete this account, with no required distributions during that time. This cannot be converted to a Roth IRA and we will be taxed on all distributions.

* DH and his sister are planning to use a portion of the inheritance to set up an endowed scholarship fund at Univ of Nebraska. For 2020 only, we can itemize this and other charitable contributions up to 100% of our adjusted gross income (AGI).

* We are planning to increase our traditional-to-Roth conversion for 2020 to increase our AGI and maximize the tax benefit of these charitable contributions. This is the part I really do not want to mess up.

Is this correct? Am I overlooking anything?

Thanks.

Kathleen
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We are planning to increase our traditional-to-Roth conversion for 2020 to increase our AGI and maximize the tax benefit of these charitable contributions... Is this correct? Am I overlooking anything?

I can't remember how old you are but in case it is relevant - how close are you to Medicare because you could incur income-related surcharges.
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I think you have the fundamentals of understanding the options. Increasing your IRA’s to Roth and offsetting it with the start of an endowment. I do think you should consult a tax attorney in this matter though.

Is it better to go this route or just go with using the inherited IRA’s as the donation and never pay the taxes on that income.

Would need to work out which is better for you tax wise. Depending on your incomes and tax situation you and your sister in law may have different approaches to this.

Nice to be able to set up the endowment. Good for you.
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Remember that you must itemize deductions in order to make use of the 100% AGI charitable contribution limit. That shouldn't be an issue if you're donating enough to fund an endowed scholarship. Otherwise, you will be limited to a $300 above the line adjustment for charitable contributions in 2020.

Ira
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My condolences on your loss. My Mother-In-Law passed away from dementia last year. I fully understand.

For 2020 only, we can itemize this and other charitable contributions up to 100% of our adjusted gross income (AGI).

My condolences on your loss. My Mother-In-Law passed away from dementia last year. I fully understand.

For CASH donations.

I don't know your ages, so this may not work. Have you considered a QCD from the inherited traditional IRA to fund the endowment?

As long as the inherited stock was "hers" and not in an irrevocable trust, the inherited stock has a stepped-up basis. If you have appreciated stock, it might be to your advantage to use it for part of the endowment. The annual deduction is limited to 30% of AGI.

You will likely receive a K-1 for income that was received during the year before distribution occurs.
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... how close are you to Medicare ....

While we are a couple of years away from Medicare, thanks for the reminder that I need to start including this in my calculations.

Kathleen
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Remember that you must itemize deductions ....

Yes -- I've become a bit complacent over the last two years of simply taking the standard deduction. Had the $600 ($300 for each of us) hard-coded into my spreadsheets because I just figured we were unlikely to be able to itemize for some time. But with the scholarship (cash), other charitable giving for the year (cash), property taxes, and mortgage interest, we will be well above the standard deduction.

Thanks.

Kathleen
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Have you considered a QCD from the inherited traditional IRA to fund the endowment?

That was our first thought, but we are 62 and 63 (and 65 for my SIL). My understanding is that a QCD requires that you have required minimum distributions.

If you have appreciated stock, it might be to your advantage to use it for part of the endowment. The annual deduction is limited to 30% of AGI.

The stock was not in any kind of trust, so its appreciation is largely irrelevant to us. We think (i.e., we have not yet seen the actual listing of holdings) that a substantial portion is in dividend and preferred stocks -- which would dovetail nicely with our current portfolio (mostly growth-oriented mutual funds) without our having to do anything.

Thanks for the heads-up on the K-1 -- that will be a new one for me.

Kathleen
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Not a tax issue, but I suggest you (or the executor) sell all of the stocks and take the distribution in cash rather than in-kind. First, there will likely be a delay getting you the assets, and there may be a hassle transferring them. Second, with commission-less trades, there is almost no cost to this. Doing so, will give you time to invest the money the way you want it invested.
Mike
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Not a tax issue, but I suggest you (or the executor) sell all of the stocks and take the distribution in cash rather than in-kind. First, there will likely be a delay getting you the assets, and there may be a hassle transferring them. Second, with commission-less trades, there is almost no cost to this. Doing so, will give you time to invest the money the way you want it invested.
Mike


Been though this recently. Distribution of stocks, mutual funds and ETFs to a beneficiary processed within a couple of days. Transfer to a different broker would take a little longer.
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Have you considered a QCD from the inherited traditional IRA to fund the endowment?

That was our first thought, but we are 62 and 63 (and 65 for my SIL). My understanding is that a QCD requires that you have required minimum distributions.


There appears to now be a disconnect between the RMD age and QCD age. QCD may continue to be 70 1/2.

If you have appreciated stock, it might be to your advantage to use it for part of the endowment. The annual deduction is limited to 30% of AGI.

The stock was not in any kind of trust, so its appreciation is largely irrelevant to us. We think (i.e., we have not yet seen the actual listing of holdings) that a substantial portion is in dividend and preferred stocks -- which would dovetail nicely with our current portfolio (mostly growth-oriented mutual funds) without our having to do anything.


Okay, even if there is cash from the estate for the endowment, it might still be useful for part of the contribution for the endowment be appreciated stock you already own. The value of the appreciated stock is the value of the donation and the appreciation isn't realized income.


Thanks for the heads-up on the K-1 -- that will be a new one for me.

K-1s are issued the tax year the estate closes for taxes. As long as the assets retained by the estate don't generate income, the estate can file a final tax return. We are looking at retaining a limited amount of funds in an estate to cover any possible unexpected expenses and "close" the estate for taxes.
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K-1s are issued the tax year the estate closes for taxes.

They can also be issued in any year there is a partial distribution from the estate. It doesn't have to be just the final year.

--Peter
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They can also be issued in any year there is a partial distribution from the estate. It doesn't have to be just the final year.

--Peter


Sorry, you are right. The capital loss isn't distributed until the final year.
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Is this correct? Am I overlooking anything?

It can depend on where you live. Here in New Jersey, we have both an estate tax and an inheritance tax.

Some of the taxes must be paid by the estate, and some by beneficiaries.

N.B.: I am not an attorney.
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