Morbid Tax Tricks

by Joe on July 1, 2013

Death. Taxes. The cliché says neither can be avoided. A good planner will advise his clients to arrange their affairs in a way that minimizes taxes for the family, especially when the end is near.

I’ve shared the strategy of Topping off your bracket with a Roth Conversion. This transaction can help reduce the tax bill for loved ones you leave your IRAs to after you pass on. As my mother in-law is approaching 90, and making small comments how she’s ready to call it quits, a thought occurred to me. (First, a disclaimer. I love my mother in-law. She’s a wonderful person to me, and a great grandmother to my daughter. I encourage her to spend her money, telling her that given the choice of her leaving a bundle or spending so I have to pay her bills in her last couple years, I’d gladly pay the bills. That’s not her nature, she’s at an age where she’s not as interested in ‘fun’ as she was just a few years ago. And she asked me to do the ‘planner thing’ to protect her money from the tax man for her daughters.)


Now, for my morbid tax trick. In 2013, she has a standard deduction of $7,600, plus an exemption of $3,900. $11,500 total for what I refer to as the “zero bracket.” Deducted from any income before any tax is calculated. For a single person, the 15% bracket ends at $36,250. A total gross income of $47,750 and $4991 in tax due to fill the 15% bracket.

Last I checked, no one knows the day they will leave this life. Any planning or clever tax moves need to be made in advance. In this case, it’s early in the year. To be specific, a large conversion from regular IRA to Roth. If mom is still with us at year end, I’ll help her recharacterize,  and repeat the cycle again next year.

The rich have estate planning loopholes that help them pass millions to their heirs. This bit of paperwork each year has the potential to save as much as $7000 for the heirs of a middle class retiree.  Not a huge sum, but better in their pockets than to Uncle Sam.

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