Too much inherited money - how to tax shelter in the USA?

There are a myriad of problems here that we will address in due time. However, your family needs to understand that TAXES ARE NOT BAD! If you were given a dollar and $0.99 went to taxes, you are still richer by $0.01. Richer is usually better! Efficiently managing your taxes is definitely a good thing, but it sounds as if your mother "cut off her nose to spite her face". I can't see how this is beneficial. In addition, if not done properly, "giving" the inheritance to her children can lead to even more taxation (the exact opposite of what she wants to do).

Lecturing aside, to answer your questions we need more info. Do you work? How much do you earn? How much did your mother give you exactly? What is your debt situation? What are your short-term spending plans (houses, cars, spouses, etc)? Does your current income, if existant, cover your current spending needs? Do you have any dependents? How old are you and when do you plan on retiring? I'm sure there are a dozen more that I haven't thought of off-hand.

Your questions are pertinent, but very broad. The result is that there is a multitude of possible answers. Please provide a more complete picture so that we can assist you. And unless its too late, DON"T DO ANYTHING UNTIL YOU HAVE A BETTER UNDERSTANDING OF THE SITUATION.

Photoguy

There has been a lot of literature accumulated on this subject over many many years, and it is what keeps estate tax attorneys in business. I suggest: spend time searching for a good attorney.

Tax laws vary widely by State. Federal law allows many alternatives. Estate planning requires accounting - e.g. advice you get here will be purely generic, and an attoreny can do a better job of orienting you to your family's situation under State and Federal laws.

As far as your father's estate goes, that is (almost surely) unchangeable, unless you find accountng errors or other mistakes in interpretation of his Will, in which case you may be able to file an ammended return to correct those. But your mother's estate can be designed. You might expect thousands of dollars in fees, but may get back more than that in tax savings.

As a matter of general principle, there is no way to legally evade taxes. You can, however, by careful planning, avoid mistakes that result in a higher tax bill.

As has been covered in this forum previously, there are (generally) three things you want to do:

1) Determine your mother's needs and wants going into the future 2) Make accurate estimates of her income, and determine her asset allocation to provide for her 3) Have her Will and estate plan drawn up exactly, correctly, by a well-selected attorney.

No offense, but you sound like you are adjusting to a new situation and are perhaps a bit in shock, getting over your father's death, and looking at a tax bill higher than you are used to paying. Proceed calmly, deliberately, and make sure you get full and cooperative participation amongst all parties involved.

It depends what 'recently' means. A beneficiary may disclaim their inheritance and pass it on to the next in line. I don't know the time limits involved, but this is worth researching. JOE

She has the wrong perspective. There's an easy way to have no taxes -- have no money. What one wants to do is maximize after-tax returns, not minimize taxes.

And remind her that the tax rate is less than 100%. So even if she pays $45 in taxes on her next $100 of interest, she's still $55 better off than if she didn't earn the interest at all.

Is she a US citizen or green card holder? If so, with that kind of money involved, she may end up paying thousands and thousands of dollars in *gift* taxes.

Why?

See my remark above about maximizing after-tax returns, not minimizing taxes.

-- Rich Carreiro snipped-for-privacy@rlcarr.com

That's my advice, too -- park the money in a nice safe money market or savings account while you do some research and figure out where you want to go from here. Only thing I'd suggest doing right away is paying off any consumer debt (credit cards, car loans, etc) you might have.

Some other ideas to think about:

No, you can't dump a lump sum like that into a 401K or IRA, but you can max out your current contributions so that you can tax-shelter as much of your assets as possible. If you have an old 401K or traditional IRA you could do a Roth conversion on, that will also let you move more money into tax-sheltered accounts (since Roth accounts are "denser" than pre-tax retirement accounts).

You might consider paying off your mortgage, although you'll get mixed advice about that.

You might want to consider increasing your charitable donations. Not only does that cut down the tax bill, but it allows you to feel good about using part of your unexpected bonus to do something meaningful.

You can reduce taxes by paying attention to holding the most tax-efficient investments in your taxable account (muni bonds, individual stocks, ETFs, index funds, tax-managed funds), and the least tax-efficient in your retirement accounts (regular bonds, REITs, funds that do lots of active trading).

-Sandra the cynic

Let me further emphasize my point. Don't do ANYTHING. No money market, no investments, no gifts, no nothing!

As I and others have said, even the act of shifting the money from your mother to you could have severe tax consequences. It is an extremely bitter pill to swallow when you discover that your feverish attempts to avoid taxation have actually increased your tax liability.

IIRC, the time limit for disclaiming an inheritance is nine months from date of death. In addition, there are certain steps necessary to make a qualified disclaimer. If time allows, encourage your mother to do nothing without first seeking the help of a qualified professional. (Note: professional assistance will not be cheap, but if done properly it will pay for itself ten-fold)

If the money does end up in your hands (or has already) then I would follow Sandra's advice and park the money in money market until you have a better understanding. That's where we can probably provide the most help.

If you worry too much about tax, you could make bad investment choices. Try to sort out the personal issues first, and don't let them influence your financial decisions. Evidently, your father has passed on his attitude toward taxes to you and your mother. Avoid his mistakes. Remember all the good things, and then drop the nonsense and move on. Think about prudent investments first and foremost and then consider taxes.  Don't let the tax tail wag the investment dog. If you pay a lot of taxes, it means you are making a lot of money. Good luck.

401k plans work by deducting your paychecks. As I

Contact a tax or estate attorney before doing anything. There may be ways for your mom to distribute the inheritance that minimizes the overall tax paid by all parties. It may be worthwhile for her to dole it out slowly and pay tax on what she holds. That might be less tax than what the recipients will pay.

If a 401k is your desired destination, consider putting the cash in an accessible account. Contribute the maximum permitted to the 401k. Replace the reduced paycheck cash flow with that from the gift. Indirectly, you'll be putting it in the 401k.

I do not mean to suggest that a 401k is or is not an appropriate strategy. I'm simply proposing a way to maximize your contributions, should you choose to. If you do, and if the gift exceeds to the maximum allowed annual contributions, you'll still need to decide what to do with the rest.

I wish I had your tax problem. -- Chris Cowles Gainesville, FL