Special rules as of Spring 2021 that allow certain assets to forgive 100% of all the taxable gains - do your parents have any of these accounts?

• First know how the rules currently work: non-retirement gains are essentially wiped away from the individual inheriting the non-retirement assets (02:25)
• Ask general questions to make your parents aware of this (04:17)

Quote for the episode: "The current cost basis rules are kind of the same thing right now where, instead of skipping a line, you get to skip all the built up unrealized gains that may have accumulated over time.”

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Welcome to the enjoy more 30s family finance

podcast. The only podcast dedicated to making life more

enjoyable for young families by hitting on the financial topics

that tend to weigh on us, stress us out, and distract our focus

from simply enjoying life.

Hello, and welcome to the fifth episode of the Your

Parents Money Mindset series. Last episode, we covered some of

the potential headaches that can arise in inheriting assets and

some great steps to avoid them ahead of time. Today's episode

is titled step up, the gain is gone, where we'll cover some

special rules as they currently exist that eliminates all the

built up gains and the taxes that go along with it from

certain inherited assets. I say 'as currently exist', because as

of today's spring 2021 recording, the current

administration is in the steps of proposing what would be very

significant adjustments to the taxable gains code. If and when

these get passed in the future, what is covered today would need

to be adjusted potentially. You will learn today what you need

to know about how the rule is situated currently, and what you

can do and help your parents to be aware of to take full

advantage of it. When I went to Disney with my wife, Lauren,

before we had kids, it was way easier to move around. Two

adults can fly around the parks, we hit pretty much everything

over just two days. The one thing that can throw a wrench

into the whole mix, though, is really long lines for the ride

you want to get on. There is this one ride at Hollywood

Studios called Toy Story Midway Mania, where you sit down in

this cart that they have with 3d glasses on and spin around

shooting in different carnival style games at the digital

screens. The problem was when we got there, we hit one heck of a

line. We were debating what to do, should we go somewhere else

circle back around. All of a sudden kind of out of nowhere,

this side door opened, a cast member asked how many were in

our party, we answered two. And we were ushered through this

door up the side entrance all the way to the front of the

line. It was a beautiful thing.

The current cost basis rules are kind of the same thing right

now, where instead of skipping a line, you get to skip all the

built up unrealized gains that may have accumulated over time.

So what you need to know is first how the rules currently

work. Let's say you bought ABC stock for $100. This is what

they call your cost basis, which is just a fancy way of saying

this is what you put in of your own money. You put in $100. So

now let's say that ABC stock went up to $150. That means you

gained 50, right? You put in 100, it's now 150, you gained

50. However, you do not get taxed on this 50 until you

actually sell ABC stock. So it's called an unrealized gain

because you have not realized it yet since you haven't sold it.

So where the stepped up basis rule comes into effect then is

if you passed away. The person who inherited the stock gets to

step up this basis or step up this assumed price that you

originally paid for it to the current value. So they inherit

the stock at the current price of 150 and we increase or step

up that cost basis number for what you originally paid from

the original 100 to the current price of 150 when you passed. So

since your beneficiary's assumed cost is also now 150, just like

the current price, if your beneficiary sold it today, there

would be no tax at all paid on it. This whole concept is only

applicable to non-retirement accounts. So just make sure

that's clear. I'll say it again. It's only applicable to

non-retirement accounts. IRAs, 401(k)s, annuities or any other

retirement type of an account have their own taxation rules.

And so the stepped up basis does not apply. So what you can do

again is ask some great questions to your parents to

make sure this is something they are aware of ahead of time. In

general when supplementing income and retirement, the rule

of thumb is to first take from your non-retirement accounts,

then your tax deferred retirement accounts. And then

from your tax free retirement accounts. So what that would

look like is any joint or general individual account, so

any non-retirement kind of account first, then from any of

your traditional IRAs or 401(k)s basically any account that you

put money into and you received the tax deduction when you did

that. Then finally, from any Roth IRAs, or Roth 401(k)s,

which are the ones that grow tax free. Again, as of today, your

non-retirement accounts generally incur the least amount

of tax, allowing your traditional IRAs and 401(k)s

which are taxed at 100% as ordinary income, to delay taking

any of those distributions. And finally, your Roth accounts that

grow 100% tax free, to let those grow as long as possible. Now,

everybody's situation is different. However, they may

have multiple joint or individual non-retirement

accounts to choose from. If you ask your parents questions such

as 'Have you ever heard of this stepped up cost basis thing? Did

you know that you have accounts that will receive this step up

and basis and kind of forgive the tax? Do you consider the

cost basis before you choose where you're supplementing your

income from?' Then you can potentially open up a

conversation to make sure they're aware of the current

rules. My guess is that you'll be met with kind of blank

stares. As always just provide the information for their own

consideration unless they ask for direct input. But you can

just say that, 'Hey, I was listening to this podcast on

stepped up basis and so I wanted to pass it along because it

could potentially avoid a lot of taxation when people are

inheriting assets.' I'm sure they don't want to pay taxes to

the government unnecessarily. So it again is just help for them.

Their advisor should really already be considering all these

items when creating a distribution plan for them, as

maybe their joint account doesn't have a lot of built up

gains, and therefore it should be distributed first, while

their individual account might have a lot of built up gains so

let's delay taking it from there. Because you know, if God

forbid something happens, all the gains will get wiped away.

So a quick summary from today is to be aware that the current

rules again as of this spring 2021 recording are that

non-retirement gains are essentially wiped away for the

individual inheriting the non-retirement assets. The

second thing is to make your parents aware of this through

some of those general questions we touched on because quite

frankly, we find very few people have had this explained to them.

Thanks for tuning in today. As always, if you are able to

implement what we can cover, then as always, that's

fantastic. You have less to worry about than before and

could focus more on just enjoying life. If you're wanting

help with these things, though, or have questions you need help

in clarifying, check out the Ask Joe section on the show's

website. www.enjoymore30s.com that's enjoy more three zero

s.com. If you enjoyed this episode specifically, please

make sure to subscribe and review us on Apple podcasts or

wherever you listen. There are literally millions of young

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like you. Clicking a star, leaving a review it really does

make a big difference. The next episode is Inheriting IRAs, More

Limited Options, where we're going to cover some recent tax

code adjustments that have been approved that drastically

changed your options when inheriting an IRA from your

parents, and what your parents can potentially do ahead of time

to try and minimize the total long term taxes that will be

paid because of it. Until next week. Thanks for joining me

today and I look forward to connecting with you again soon.

The conversations on this show are

Joe's opinions and provided for general information purposes

only. They do not constitute accounting, legal tax or other

professional advice for your specific situation. You should

always seek appropriate advice from a financial advisor,

accountant, lawyer or other professional before acting upon

any content or information found here first, Joe is affiliated

with New Horizons Wealth Management LLC, a branch office

of TFS Securities Inc and TFS Advisory Services an SEC

registered investment advisor member FINRA/SIPC.