Large Roth conversion when terminally ill

[fyre4ce]

I get the sense that anything I suggest is not going to be acceptable to you for some reason, while you seem fixated on form 709. I did not say anything about liquidating the taxable account now. Obviously, you would want to liquidate it after it passes to the estate with a stepped-up basis. Retirement accounts and life insurance proceeds pass outside of probate because distribution is determined by the beneficiaries. If there are no named bene’s, then the account(s) pass through the estate, also. Cash, taxable accounts, and all other assets owned outright by the decedent, along with all debts of the decedent, pass through the estate. These assets do not have “beneficiaries” unless they are already in a trust, and they do not pass any more quickly through the estate than do the cars or furniture. Cash may well be the last thing to be distributed (when the bank account is wound down and any balance split among heirs) because it is needed to pay the debts of the estate (such as, ahem, income taxes).

I have some concerns about this conversation and I believe it is in both our best interests for me to bow out of participation at this point. Good luck in finding the solution you seek.

No problem; thanks very much for your time.

[jfoxcpacfp]

Cash, taxable, and IRAs are all not in a RLT; my brother and I are both 50% beneficiaries on all of these accounts, so my understanding is that means they transfer very quickly into our names (regardless of whether any other property eg. primary home is in a RLT), without probate or involvement from an executor. If I'm wrong about that, please correct me. The idea would be to use liquidated taxable assets to pay the tax bill, but because the taxable assets would already legally belong to my brother and me, we would have to transfer them back into the estate, which is the transfer I'm concerned about having any unforeseen issues like gift tax. The instructions for Form 709 only talk about gifts to people and trusts, not estates, so I assume this transfer would not have any unwanted side effects, but I have not been able to confirm. Hope that makes sense.

It doesn't make sense for my mom to sell some taxable assets now and set the cash aside, because the capital gains tax would eliminate any tax savings from the Roth conversions, and more I'm sure. Withholding taxes from the conversion would not be as bad, but still undesirable as it reduces the assets that are inside tax-protected accounts.

I get the sense that anything I suggest is not going to be acceptable to you for some reason, while you seem fixated on form 709. I did not say anything about liquidating the taxable account now. Obviously, you would want to liquidate it after it passes to the estate with a stepped-up basis. Retirement accounts and life insurance proceeds pass outside of probate because distribution is determined by the beneficiaries. If there are no named bene’s, then the account(s) pass through the estate, also. Cash, taxable accounts, and all other assets owned outright by the decedent, along with all debts of the decedent, pass through the estate. These assets do not have “beneficiaries” unless they are already in a trust, and they do not pass any more quickly through the estate than do the cars or furniture. Cash may well be the last thing to be distributed (when the bank account is wound down and any balance split among heirs) because it is needed to pay the debts of the estate (such as, ahem, income taxes).

I have some concerns about this conversation and I believe it is in both our best interests for me to bow out of participation at this point. Good luck in finding the solution you seek.

[fyre4ce]

So I went back and read more of your answer. I don’t see a statement anywhere that the cash and taxable are in an RLT, though, you were going to check. If they are, my answer doesn’t change. You can loan money to the estate while it’s being settled. Still not a gift.

Cash, taxable, and IRAs are all not in a RLT; my brother and I are both 50% beneficiaries on all of these accounts, so my understanding is that means they transfer very quickly into our names (regardless of whether any other property eg. primary home is in a RLT), without probate or involvement from an executor. If I'm wrong about that, please correct me. The idea would be to use liquidated taxable assets to pay the tax bill, but because the taxable assets would already legally belong to my brother and me, we would have to transfer them back into the estate, which is the transfer I'm concerned about having any unforeseen issues like gift tax. The instructions for Form 709 only talk about gifts to people and trusts, not estates, so I assume this transfer would not have any unwanted side effects, but I have not been able to confirm. Hope that makes sense.

It doesn't make sense for my mom to sell some taxable assets now and set the cash aside, because the capital gains tax would eliminate any tax savings from the Roth conversions, and more I'm sure. Withholding taxes from the conversion would not be as bad, but still undesirable as it reduces the assets that are inside tax-protected accounts.

[jfoxcpacfp]

Thanks very much for your kind words, and your time and expertise.

I considered a loan, but the biggest problem is that my brother and I don't have the necessary cash (~$300k total for both of us, for the size conversion that makes the most sense) right now. I could possibly borrow it on a HELOC or something but that's way too complex

I agree that paying the taxes from the liquidated taxable account is the best plan for several reasons. It's just the necessary transfer from my account (half the brokerage would become mine, outside of probate) to the estate/executor that's got me concerned. The instructions for Form 709 are silent on whether transfers to an estate are subject to gift tax, so I'm inclined to say no, but haven't been able to definitely rule out this or any other problems with such a transfer. If I need to file a Form 709 that's not the end of the world - most likely, I will not owe any estate tax. But I'm young, and who knows what my financial situation, and estate tax law, will be decades from now.

So I went back and read more of your answer. I don’t see a statement anywhere that the cash and taxable are in an RLT, though, you were going to check. If they are, my answer doesn’t change. You can loan money to the estate while it’s being settled. Still not a gift.

[fyre4ce]

I didn’t read through paragraphs 2 - 4, so lmk if I miss something that w/change my answer:

This would not be a gift. You and your brother each would loan money to the estate as an advance against the receipt of your bequests. You could actually loan money to your mom now and she would pass with the outstanding debt and you would be repaid from what you stand to receive after all other debts and expenses of the estate are paid. I would write up a note and have it properly recorded, notarized, witnessed or whatever is required in CA and/or NY. Of course, you would be secondary to a current creditor, mortgage- or lien-holder, but that is not what this is about.

OR - you could just pay the bills with the cash and by liquidating the taxable account, which is the simplest solution.

We have done the same (loan) with my husband’s estate, illiquid except for significant RE holdings, which are taking time to have appraised and sold (small town).

Hang in there and enjoy what time you have left with your mom. Again, so sorry for this.

Thanks very much for your kind words, and your time and expertise.

I considered a loan, but the biggest problem is that my brother and I don't have the necessary cash (~$300k total for both of us, for the size conversion that makes the most sense) right now. I could possibly borrow it on a HELOC or something but that's way too complex

I agree that paying the taxes from the liquidated taxable account is the best plan for several reasons. It's just the necessary transfer from my account (half the brokerage would become mine, outside of probate) to the estate/executor that's got me concerned. The instructions for Form 709 are silent on whether transfers to an estate are subject to gift tax, so I'm inclined to say no, but haven't been able to definitely rule out this or any other problems with such a transfer. If I need to file a Form 709 that's not the end of the world - most likely, I will not owe any estate tax. But I'm young, and who knows what my financial situation, and estate tax law, will be decades from now.

[jfoxcpacfp]

I didn’t read through paragraphs 2 - 4, so lmk if I miss something that w/change my answer:

This would not be a gift. You and your brother each would loan money to the estate as an advance against the receipt of your bequests. You could actually loan money to your mom now and she would pass with the outstanding debt and you would be repaid from what you stand to receive after all other debts and expenses of the estate are paid. I would write up a note and have it properly recorded, notarized, witnessed or whatever is required in CA and/or NY. Of course, you would be secondary to a current creditor, mortgage- or lien-holder, but that is not what this is about.

OR - you could just pay the bills with the cash and by liquidating the taxable account, which is the simplest solution.

We have done the same (loan) with my husband’s estate, illiquid except for significant RE holdings, which are taking time to have appraised and sold (small town).

Hang in there and enjoy what time you have left with your mom. Again, so sorry for this.

[fyre4ce]

Circling back here.

On the ethical/relationship issues: While these are not primarily what I posted to get advice about, and gave some detail only to provide context, they are clearly more important in the big picture than the tax stuff. The problem is, the situation is much too complex to fully describe in a forum post, and I worry that some here have gotten the wrong idea, so at risk of prolonging a painful discussion I want to clear a few things up.

I am absolutely trying to act in my mom's best interest. She has asked me on many occasions over the last few months and years for help with her investments, including how to save taxes on her inheritance. I suggested she do a smaller Roth conversion last year (also for her benefit - NY exempts $20k of IRA withdrawals from state tax) and she did. She has also contributed all her earnings to Roth accounts rather than pre-tax. There is no doubt that she supports a tax strategy that will increase the value of her estate, as long as it doesn't cause problems today. There is no credible scenario when her unreimbursed medical bills will get anywhere near $1M, so a 6-figure Roth conversion presents no hazard there. In other areas I suggest things in her interest and against mine. I suggested a 40/60 asset allocation (she was 100% stocks before I got involved) so she's not worrying about market swings, when if investing the money for my brother and me, 100% stocks would be better. I also encourage her to spend her money on herself every chance I get, but she usually doesn't because she's frugal and it would seem wasteful.

This is a very difficult position for me to be in. I have asked, bordering on pleading, multiple times for her to go hire an estate planning attorney who will work just for her and who can execute a plan according to her wishes, and take me out of the loop. She won't do it - she says it would be too upsetting, and prefers to deal with me instead because she trusts me more than a stranger. So, I am left to reach out for help on my own.

Someone asked what we would do with the inheritance money and questioned whether it was worth doing any tax planning. Both my brother and I are healthy financially, with our basic needs (food, etc.), and more, well-covered by our own resources. But, we live in VHCOL areas. I would apply any inheritance toward paying down our mortgage to reduce budget stress, and also to save more for our kids' education in 529's. My brother does not yet own a house and would save any additional money toward a future down payment. Whether these are worthy goals is entirely subjective. My view is that as long as a tax strategy doesn't negatively affect my mom financially or emotionally, and serves her stated goal of increasing the value of her estate, it's worth doing. I discussed this with my brother, and we both agree that we should pick an appropriate time to calmly suggest what she should do, and why. If she says no, for any reason, that would be the end of it. If she says yes, then we'll ask whether she would like help or would prefer to do it on her own. I don't know whether her other property is in a trust to avoid probate, but that would be a good time to ask too.

I hope this closes this part of the issue, and resolves (or at least addresses) everyone's concerns.

On the tax issues:

I still have not gotten an answer (I've looked elsewhere too) on whether it's possible to give money to an estate to cover an income tax bill on a final return. When all the other details are boiled off, that is the core of the tax question. I haven't found a reason why it would be impossible/prohibited, and I don't think a Form 709 would be required because it's not a gift to a person. If any experts know and are willing to confirm this, that would still be a help.

[afan]

Just a reminder that under a POA, you would be obligated to act in HER best interests, not your own. I would be careful to keep these separate.

It is clear how the conversion might help you. It is not so clear how it would help your mother.

At this stage, it also appears unclear how long she will live or what her expenses may be. If she goes into long term care or a nursing home, the costs can go up quickly. Right now she probably has enough assets to cover the expenses. Given the tax deductibility of these costs, it is not necessarily true that Roth conversions now will result in tax savings.

Your mom may or may not need someone to act under a general power of attorney.

If she does, with all due respect, it should not be you or your brother. You both think you stand to profit from doing things that are not necessarily in her best interests and you are planning to go forward anyway.

The person acting as attorney in fact should not be thinking this way. The person who would be executor has already been chosen as your mom to handle her final affairs. She would be the logical person to hold the POA. Since she is not a beneficiary, she would have no conflict of interest and could analyze whether the conversions would be in YOUR MOTHER's best interest.

[dennis]

I am sorry for your troubles and it must be hard losing your mother living at such a distance apart. One thing you and the executor might want to check on is how her other assets, if any, are titled. Are they in a revocable trust so that you can avoid probate? It varies from state to state how much assets are subject to probate so that should be something you should also discuss with the estate attorney.

[Tim]

"I have traveled to see her twice in the last few months (not easy given our geographic separation) and plan on making more trips soon."
With privileges come responsibilities. I would view this from a practical standpoint as well. The separation is an issue. The goal should be to make sure all her bases are covered. I would not blindly accept that responsibility. Safeguarding and planning is one thing, but picking up the mail, paying the bills and handing out cash for purchases can be logistically difficult. She might not be there yet but a time may come. You need to think of this full Financial POA similar to adopting a child. Once you step in to an "implied" responsibility, it is difficult to walk it back. The mutual understanding of responsibilities is different than access in EOL situations.

[MPMD]

I appreciate the suggestion. I may personally hire an estate planning attorney in her state to help. It's not so easy being on the other side of the country, but I'm sure we can consult over the phone and pay by credit card. We may run into a wall, because I don't want my mom involved at all, but we can see how far we go.

I agree there is some murky terrain here. The real problem is that my mom doesn't want to discuss a large Roth conversion, or really any other detailed estate planning, because she would view as an acknowledgment she won't survive the year. (Whether she actually will or not is unclear right now.) Frankly I can understand the desire to not be brought forms to sign while on my death bed. Earlier this year, when we discussed the PoA I mentioned the possibility of large Roth conversions and she was OK with the concept, but again has said she doesn't want to know the details. I have taken her statements as permission. The only other person affected is my brother - we are 50/50 on all her accounts - and I've discussed it with him and he's okay with it.

If a conversion would move money from, say, an account where I am a 50% beneficiary to one where I am a 100% beneficiary, then yes, that would be ethically prohibited, but that's not the case here. Or, if one of us were very low tax and the other were high-tax, Roth conversions to benefit one heir could also be ethically dubious, but fortunately we're in very similar tax situations.

One of my mom's sisters (not the executor) is financially literate, and I have discussed this plan with her and she is OK with it. Her opinion is that as long as it doesn't cause my mom any emotional turmoil, and it would save taxes for my brother and me, then it's okay to do.

yeah i mean please take this all as attempts to be helpful during a difficult time.

if you mom doesn't want to discuss financial moves right now then isn't she kind of voting with her feet on what should be done?

again i don't know how any of this would play out but if someone what looking at this (IRS, state court etc) would you be in a convo like this:

"so this move saved you taxes?" it did
"was your mother involved in the decision?" no.
"why not?" ... ... we didn't want to involve her

[jfoxcpacfp]

Not even going to try to address the issues, b/c I’m not her CPA or attorney. Really need to have a team to go over this and advise, but I (personally) w/b pretty uncomfortable about bringing this up other than in an anonymous situation like this forum. Even then w/b difficult.

Sincerely sorry about your mom. Hope you have plenty of time to spend together talking about your lives and how grateful you are to her for doing such a good job of raising you and your brother. The money really isn’t that important when it gets down to it unless it will make a huge difference in being able to afford basic living expenses, jmpo and what I would say to a client. Sometimes the WCI crowd goes a little overboard in this area w/o realizing it, no disrespect intended.

[fyre4ce]

"I know her accountant's name, but he doesn't know me and I doubt he would speak to me as I am not a general PoA for all her affairs."

This is fixable, very easily, Not just the accountant, but the estate planning attorney. They can easily get authorization to discuss her financial affairs. All are on the same team. You say you have financial POA but it sounds like you have only dealt with the brokerage firm. It is important that both a healthcare POA and a financial POA are in place. You have no idea when you (or your brother) will need them to act on her behalf. It is for her benefit and communicate for her and it provides them with legal authority to communicate with you as well. She can then delegate to you as she wishes.

You are not alone, I would make that call to the accountant and then to an elder law attorney and get their inputs. Of course there are things she does not wish to deal with.
That does not change the facts and circumstances.

Thanks. She doesn't have an estate planning attorney. I am thinking *I* need to hire one to help me through these questions.

You are correct - I have a PoA form filed with her brokerage that covers her IRAs and taxable account, but it's not a general PoA that I can take to an accountant, etc. It looks like NY state has a form. I'll ask my mom if anyone else is already a durable PoA. If so maybe I could be a separate agent.

[Tim]

"I know her accountant's name, but he doesn't know me and I doubt he would speak to me as I am not a general PoA for all her affairs."

This is fixable, very easily, Not just the accountant, but the estate planning attorney. They can easily get authorization to discuss her financial affairs. All are on the same team. You say you have financial POA but it sounds like you have only dealt with the brokerage firm. It is important that both a healthcare POA and a financial POA are in place. You have no idea when you (or your brother) will need them to act on her behalf. It is for her benefit and communicate for her and it provides them with legal authority to communicate with you as well. She can then delegate to you as she wishes.

You are not alone, I would make that call to the accountant and then to an elder law attorney and get their inputs. Of course there are things she does not wish to deal with.
That does not change the facts and circumstances.

[fyre4ce]

i am not a lawyer or an estate expert but both of these bolded statements are concerning enough to me that i would seek professional help on this and err on the side of not doing it.

again lacking expertise but i think if you mom is not in a position to make independent decisions about her assets i would avoid doing anything as her POA that could only be seen as beneficial to you on distribution of the estate.

I appreciate the suggestion. I may personally hire an estate planning attorney in her state to help. It's not so easy being on the other side of the country, but I'm sure we can consult over the phone and pay by credit card. We may run into a wall, because I don't want my mom involved at all, but we can see how far we go.

I agree there is some murky terrain here. The real problem is that my mom doesn't want to discuss a large Roth conversion, or really any other detailed estate planning, because she would view as an acknowledgment she won't survive the year. (Whether she actually will or not is unclear right now.) Frankly I can understand the desire to not be brought forms to sign while on my death bed. Earlier this year, when we discussed the PoA I mentioned the possibility of large Roth conversions and she was OK with the concept, but again has said she doesn't want to know the details. I have taken her statements as permission. The only other person affected is my brother - we are 50/50 on all her accounts - and I've discussed it with him and he's okay with it.

If a conversion would move money from, say, an account where I am a 50% beneficiary to one where I am a 100% beneficiary, then yes, that would be ethically prohibited, but that's not the case here. Or, if one of us were very low tax and the other were high-tax, Roth conversions to benefit one heir could also be ethically dubious, but fortunately we're in very similar tax situations.

One of my mom's sisters (not the executor) is financially literate, and I have discussed this plan with her and she is OK with it. Her opinion is that as long as it doesn't cause my mom any emotional turmoil, and it would save taxes for my brother and me, then it's okay to do.