The Inheritance Playbook

by | Financial

What can you do to avoid tax implications?  

Inheritance.

It’s a word that can ruffle some feathers in some families, but if you don’t plan for it you can wind up losing some of the money.

Whether your parents have a lot to leave or a little, there are strategies to implement while they’re still alive to save time and money.

Chad Holmes is a financial planner and CPA who has written a book to help people be prepared with some tax-saving strategies. The book is called The Inheritance Playbook: Helping Your Parents Pass the Torch, Not the Tax.

Kim and Mike Barnes of Parenting Aging Parents talk to Chad about some of the strategies and the stories that he’s encountered to help families not face unnecessary taxes and expenses. 

Click here if you’re interested in the book. 

Read the full transcript

Transcript of Interview: “The Inheritance Playbook”

Mike Barnes:

Inheritance is a word that kind of scares some people, I think, but it’s something that you really need to plan for and prepare for. 

Kim Barnes

You have to plan ahead of time. Planning means plan ahead of time, right? Today, we’re going to talk with Chad Holmes, who wrote a book about this subject called The Inheritance Playbook. Chad, thanks so much for being with us.

Chad Holmes:

So happy to be here. Thank you guys.

Kim Barnes:

You know, as Mike said, when you talk about inheritance, it’s sort of a touchy subject sometimes. It can be, but I think that for most of us, we would want our loved ones to be able to get as much as they can.

Chad Holmes:

Absolutely. It’s about your legacy. As the book’s subtitle is “Helping Your Parents Pass the Torch, Not the Tax.” The audience is people dealing with their aging parents, and we don’t want that torch, that legacy, the estate they’ve worked so hard to build over their lifetime, to be wasted away to inefficient taxes or fees, fines, probate, what have you. If we can do some proactive planning ahead of time, not only do we maximize their legacy, but we maximize our after-tax inheritance, which can be so powerful when we’re dealing with this mega wealth transition that’s upon us right now in the United States. I think there’s tens of trillions of dollars expected to be passed down over the next couple of decades, and most of that is happening without any proactive planning. A lot of it’s without any estate documents, and a lot’s going to be wasted in probate and taxes and an inefficient manner. So, it’s taking a look at some of the ideas here that are free things you can do proactively. It can be really exciting and empowering to those families that are hoping to not just squander it all away unnecessarily.

Mike Barnes:

True. What’s one of the biggest things that we should be doing?

Chad Holmes:

I think one of the biggest things is taking an inventory of your parents’ assets. If we don’t know that they had a safe deposit box or that they had jewelry somewhere or a life insurance policy or a long-term care policy, if we don’t know who to contact to get in touch with their Schwab account, or did they have a Schwab or Fidelity account, there are so many things that can be hidden and unknown. As you’re going through probate, if you’re not even aware that it exists, it just creates a whole mess and delay of passing down assets. So, I think understanding what they have, what they owe, what bills are on autopay, things like that really matter in those next few months after they’re gone when you’re just depressed and sad. We just lost an incredible loved person in our life. Let’s get some things straightforward and on autopilot so that we don’t have to do as much thinking when the worst happens.

Kim Barnes:

When you think about the tax implications, is that one of the biggest challenges that you see that can be more easily eliminated? What are some of the things that people should be thinking about, maybe in terms or things to ask questions about?

Chad Holmes:

Yes, that’s one of my favorite subjects discussed in this book. A lot of times, we think of proactive estate planning and the default answer is, “Hey, let’s just put everything in a trust.” For some reason, trusts scare people. They think, “That’s for the mega-rich. I don’t know how to do that.” But what this book goes into is a lot of tax strategies, but it’s told in story format. We’ve got characters in here that are doing things one way and then, uh-oh, we realize they messed up. Here’s what they could have done and here’s why it matters. One example is, and this is a common one: your parent is 85 years old, their income is basically just IRA money and Social Security. Meanwhile, you’re 60 years old, you’re at the peak earnings of your life, you’re in the highest tax bracket you’ve ever been. If you were to inherit their IRA, you will pay ordinary income tax on that money at your highest bracket. Meanwhile, your parent pulling it down is paying an average of 8 to 12 percent effective rate. Well, what if we did just advanced distributions? Let’s have them pull out money over the next few years and pay 10 or 12 percent on it. That way, when you inherit it, you get a step-up in basis on the money, i.e., you’re not paying taxes, and you get it instead of paying at 24 or 32 percent or whatever your bracket is now that you’re in your highest earning years. So, that’s just a simple play. Let’s look at financial planning from a lens with two generations. Obviously, if you just look at the parents’ tax play, it’s like, well, don’t pay more taxes than you have to; let’s keep it at five, six, eight percent average rate. But when we step back and say, all right, what about family legacy, family wealth between these two generations or these three generations? How can we minimize taxes for the whole family? It turns out a lot of times, let’s just have the aging parents do advanced IRA distributions. That’s a simple one you can do over multiple years, assuming there’s a multiple-year life expectancy. That way, we’re just minimizing the ordinary income that gets passed down, and instead, we can either do Roth conversions so that you inherit a Roth IRA, or we can just pull out into an individual or a joint brokerage account that your parent has that gets passed down to you. Step two of that is, instead of having that account go through probate, add a transfer-on-death designation to it so that it avoids probate and goes directly to the beneficiaries. That’s a free idea. It doesn’t cost you anything, and there’s no taxes involved. It’s just, hey, slap this onto the investment account and, boom, you avoid probate. Very simple stuff.

Mike Barnes:

You used the term “mega-rich” a second ago, and I think a lot of people think, “Well, my mom and dad aren’t that rich. I’m not going to have any tax problems. They don’t have that much money.” But I think what you just said is a great example that it doesn’t matter how much money you have, there are ways that the government can get some of the money instead of you getting it.

Chad Holmes:

Of course. A lot of times, the only thing that gets passed down is the house. Perhaps they’re only living on Social Security, and all they have is their house. Sometimes, the parent gifts the house to the children so that it doesn’t go through probate. When you gift the house, not only are gift taxes probably not going to apply, but you have to file a gift tax return. That’s too in the weeds for now. But what happens is you also are gifted their basis in the house. If they purchased the house 30 years ago for $100,000 and it’s now worth $300,000, they gift you the house, your basis is $100,000. When they pass and you sell it, you owe capital gains taxes on that $200,000 gain at 15 percent. That’s $30,000 in taxes. However, had you just let it go through probate or put a quick claim deed on it or a ladybird deed—every state has their own version of it—you can still avoid probate, put it in a trust, whatever, but you get what’s called a step-up in basis at death. Therefore, when they pass, the home is now valued at what the market values it at, but your basis is also valued at what it’s worth on their day of death. So now you inherit this home, and your basis is $300,000, and you can sell it for $300,000—zero taxes owed, $30,000 saved right there. With just understanding how things work, it didn’t cost money to do that. It’s just not putting the cart before the horse and acting without knowing the consequences. I mentioned in the book that financial planning, especially with two generations, is like a Rubik’s Cube. You’re looking at one side, trying to get the colors right, and boom, I did it. I solved this one problem. Oh, but now the other side is just totally messed up. So, what we want to do is understand how every move affects something else with that generation, with this generation, and what’s our long-term goal here.

Kim Barnes:

I think it can be, even just hearing some of the terms that you’re throwing around, for somebody if you’re not already familiar or haven’t been paying much attention to these kinds of things, it can be really intimidating as far as thinking, “Okay, I don’t know what all this means, and am I doing it right? How do I have those conversations?” So, I think it can be kind of intimidating.

Chad Holmes:

It’s absolutely very intimidating. In fact, I wanted to call the book Tax Efficient Inheritance when I was writing it, and my wife, who is not a financial guru, said, “I don’t know what that means. I hate that name. Don’t do that.” I had already bought the domain for it. I was like, this is an awesome name, Tax Efficient Inheritance. This is great. She’s like, “That’s dumb.” So…

Kim Barnes:

Thanks for speaking for those of us who may not be as savvy because you just think, “Oh, either my parents don’t have enough, or I don’t really understand what that means, so it must not apply to me.”

Chad Holmes:

Yes, and a lot of times we hear, maybe you don’t hear, I hear because I follow this stuff, but the estate tax, you know, taxes are only applied to estates worth almost $13 million. When people hear that, they’re like, “I don’t have that problem. I don’t need to do anything.” But this book goes into all the ways that accidents or errors can take place if you’re not being proactive with your parents while they’re still here. There’s just so much that can be done on the front end to save you both time and money on the back end. It’s told in story format. I did not want to write a tax textbook. I wanted to write stories with characters, and I put a lot of humor in. In fact, if you read the Amazon reviews, you’ll see most people are commenting on the humor throughout the book, the sarcasm, and I try to make it entertaining with characters and silly mistakes. Then we just kind of go through the lesson almost like a parable: “Hey, and then here’s what should have happened, and here’s how they could have done it, and here’s a few warnings, and here’s some bonus content on that idea.” I’m really proud of how it turned out because I think it is an easy read that takes these intimidating concepts and breaks them down, makes them digestible, understandable, and I do have a few definitions in there too. I’m like, “Hey, this is a weird word. Let me tell you what that means and why it’s important to know this word.” In fact, in the introduction, half the introduction is about probate because what I wanted to do was identify, “Hey, I’ve got a lot of solutions in this book, but if you don’t understand that you will have a problem someday, you probably don’t care about the solutions.” So, I open up with what is probate and how long and expensive probate is so that people, if all they read is that, it’s enough to make you want to think, “Okay, yeah, this is definitely something that I need to get in front of.”

Kim Barnes:

Definitely something for not just the ultra-wealthy but for people who might have an IRA, for anybody.

Chad Holmes:

If that’s all they have is an IRA, this book is perfect. Like you said, ultra-wealthy probably there’s a lot more stuff with trusts and life insurance that need to be addressed. This book doesn’t do that. It’s mainly for families with any level of inheritance. Now, if you’re to the point now where you’re already paying for all your parents’ needs and things like that, there are a few chapters in this book that will be helpful, but it won’t be the gold mine that it will be for families that expect some inheritance. We’re talking a few thousand dollars or just the house or up to several hundred thousand dollars or even a couple of million dollars. The solutions discussed here are going to be extremely valuable to anybody expecting some level of inheritance.

Kim Barnes:

Are some of these solutions things that I can do once I understand what the steps might be that I can do myself, or am I going to need to get my financial planner and/or CPA or other people on our team to help us with it?

Chad Holmes:

My hope is, because we’re not allowed to give blanket advice out there in the world because that’s dangerous, that this raises questions and ideas that I do my best to explain so that people can understand and do them themselves. If it is too complex, you’ve got the terms and the ideas that are easy to Google. If you do have a financial advisor or an accountant, these are topics that they will gladly discuss with you. What I think happens a lot of times is these are not topics that your CPA or financial advisor bring up proactively because you’re their client, not the parent or, vice versa, not the children. If I’m the CPA for the 85-year-old aging parent, I’m not trying to increase their taxes because they’re paying me to lower their taxes. These relationships are often advisor and client. It’s very rarely made so that the advisor is working with two generations. If that’s not happening, then we’re missing out on a lot of opportunities. We’re leaving a lot of money on the table. In fact, I believe in that so much that at Formula Wealth, what I do is a household group flat fee. So, hey, if you want to bring your parents on, no extra charge because I believe so deeply that so much value can be added when we group these things together. If they’re separate, you’ve got conflicts of interest and things like that. Especially if you’re power of attorney over your parent and you’re able to make these decisions unilaterally for the good of the two generations, there’s a lot of opportunity out there for you.

Mike Barnes:

That’s great. Lots to think about, Chad. You’ve given us some great tips, and I know there’s even more in the book. Thank you very, very much.

Chad Holmes:

 I appreciate you guys having me on. We’ve got The Inheritance Playbook. This is my author copy, so there’s a “not for sale” tag there, but it’s out there. It’s a fun read, it’s light, you can knock it out in a weekend, and the audiobook is out there too. I believe it’s on Audible right now.

Kim Barnes:

All right, thanks so much.

Mike Barnes:  Thank you very much.

I think it’s something that we all just need to plan for. We always talk about it over and over and over: plan and prepare. It’s going to help you in the long run.

 

Kim Barnes: Don’t be intimidated by the things you don’t necessarily already know about because there are ways to learn about them.

Mike Barnes:

Exactly. Hey, if there’s any other topics you’d like us to discuss, please let us know. Parenting Aging Parents.

*This transcript is auto-generated. Please excuse any typos or mistakes.

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