Wouldn't it be great if you could keep the Internal Revenue Service (IRS) from gobbling up your parents' hard-earned money?
Some people only think of the "death tax" question when their parents are close to the end of their lives, when it's too late to do too much. If you start now, you have more options to preserve their financial assets. By working together--and enlisting the aid of a tax professional--you and your parents can save money now, and reduce the estate taxes that will come due after their deaths.
Tax-saving strategies for different needs
There are options available no matter where your parents stand on the financial spectrum, from high to low income and assets.
- Your parents can give money to beneficiaries now, instead of later. Basically, the estate tax that can be collected upon their death will be lowered if the total estate value is lower. So, giving children or grandchildren money each year may be preferable to waiting to distribute a lump sum at the end of life. These gifts do not have tax consequences; however, there are limits to how much each person can receive.
- Your parents can create trusts for their assets. Trusts can be complicated, but there are many advantages to having them: you can avoid probate court later, and name the conditions under which a beneficiary can receive the contents (by becoming a certain age, along with any other stipulations).
- You can manage their IRAs in a way that reduces taxes. Using an IRA-BDA (Beneficiary Distribution Account) lets you withdraw IRA funds over a period of time after the account owner dies, instead of getting it all at once in a lump sum. That lessens the tax burden for you. The account continues to grow tax-free, and the beneficiary continues to receive distribution payments.
- Do you provide a large amount of financial support for a parent-more than half of what they receive? If so, you may be able to claim your mother or father as a dependent on your taxes. This only benefits your tax situation, but it's an important thing to think about, especially if you're providing them with a place to live.
- Is a parent eligible for the disabled tax credit? If their income is less than $17,500 (or $25,000 if married), and disabled, they may be able to claim a tax credit.
Helping your parents hold onto their financial well-being and avoid the stress of tax liabilities can be difficult, especially if you try to go it alone. Talk to a tax attorney about the best way to maximize their assets and look out for your own as well.