Inheritance and ACA

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
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Ruger
Posts: 150
Joined: Fri Jun 09, 2017 9:44 pm

Inheritance and ACA

Post by Ruger » Mon Oct 30, 2017 10:27 am

I currently get my health insurance through the ACA.
Last year and next year no problem qualifying, but for 2017 I have a question.
I will be inheriting somewhere between $350,000-$400,00 before the end of the year.
If I understand correctly, inheritance does not count as income for ACA, but capital gains do.
Does that mean any capital gains associated with the inheritance counts as income and could
possibly cause the loss of my subsidy, depending on how much they increase my income?

As an aside, this is money I potentially plan to live off of so I can avoid digging into my retirement funds until
I turn 70 and get forced into RMD. I want the money to be 100% safe and the only thing of I can think to
do with it is invest it in laddered CD's. I'm comfortable with a low return on this portion of my money since I
have a nest egg invested in a mix of stocks and bonds. Any other suggestions? I actually will probably need none to
little of this money until I turn 70, but I want it there and safe just in case....

Nyc10036
Posts: 230
Joined: Wed Oct 05, 2016 6:29 pm

Re: Inheritance and ACA

Post by Nyc10036 » Mon Oct 30, 2017 11:02 am

The amount of the inheritance does not matter.
What matters is MAGI for 2017. Basically it line 37 on Form 1040. https://zanebenefits.com/blog/how-t ... ncome-magi
And yes, you may be forced to re-pay your PTC Premium Tax Credits but not your CSR Cost-Sharing Reduction.

bberris
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Re: Inheritance and ACA

Post by bberris » Mon Oct 30, 2017 11:42 am

If you inherit stocks, bonds, funds, your basis is stepped up to the value on the day you inherit (I guess this means when the property is transferred from estate to your name.) So you won't have any capital gains to worry about unless you sell, and then only on the gains, if any, since you inherited. Dividends are also ACA income, even if they are 0 % taxed.

MP123
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Re: Inheritance and ACA

Post by MP123 » Mon Oct 30, 2017 11:48 am

What form does this inheritance take? An inherited IRA for example may have required minimum distributions. If it's a regular old taxable account then you may owe capital gains tax on any increase from the date of death until you sell.

Spirit Rider
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Re: Inheritance and ACA

Post by Spirit Rider » Mon Oct 30, 2017 3:19 pm

Standard tax-efficient asset location advice. Especially if you are going to have little need for this money before 70. You only have the ACA MAGI issue until 65 when you will go on Medicare.

If you have sufficient tax-advantaged space for tax inefficient assets, you would be best off reserving taxable space for tax efficient assets. I would suggest a Total Market or S&P 500 index fund, preferably at Vanguard, because with their Mutual Fund/ETF structure they seem to throw of the least yearly capital gains.

You could either spend the distributions or reinvest them. If you reinvested them you could use specific lots when distributions are required to minimize any capital gains.

If you really need some assets to be available, you could put them in a municipal money market fund or a term limited municipal bond fund. The interest from both would still get included in the ACA MAGI, but the interest/dividends would be lower.

Ruger
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Re: Inheritance and ACA

Post by Ruger » Mon Oct 30, 2017 5:03 pm

MP123 wrote:
Mon Oct 30, 2017 11:48 am
What form does this inheritance take? An inherited IRA for example may have required minimum distributions. If it's a regular old taxable account then you may owe capital gains tax on any increase from the date of death until you sell.
My understanding is that the items in the trust fund (individual stocks and bonds) will be sold. Cash will be distributed to the heirs. No IRA's are involved. So we each will be responsible for any capital gains taxes on what we receive, but my question was does that count as income for ACA? It looks like it will.

Ruger
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Re: Inheritance and ACA

Post by Ruger » Mon Oct 30, 2017 5:05 pm

bberris wrote:
Mon Oct 30, 2017 11:42 am
If you inherit stocks, bonds, funds, your basis is stepped up to the value on the day you inherit (I guess this means when the property is transferred from estate to your name.) So you won't have any capital gains to worry about unless you sell, and then only on the gains, if any, since you inherited. Dividends are also ACA income, even if they are 0 % taxed.
Everything in the trust is being sold and the money distributed to the heirs. That's what I needed to know, if capital gain are counted as ACA income.

MP123
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Re: Inheritance and ACA

Post by MP123 » Mon Oct 30, 2017 5:11 pm

Ruger wrote:
Mon Oct 30, 2017 5:03 pm
MP123 wrote:
Mon Oct 30, 2017 11:48 am
What form does this inheritance take? An inherited IRA for example may have required minimum distributions. If it's a regular old taxable account then you may owe capital gains tax on any increase from the date of death until you sell.
My understanding is that the items in the trust fund (individual stocks and bonds) will be sold. Cash will be distributed to the heirs. No IRA's are involved. So we each will be responsible for any capital gains taxes on what we receive, but my question was does that count as income for ACA? It looks like it will.
Capital gains will count towards ACA.

But I would think your trustee would pay tax from the trust prior to distributing to the heirs and closing the estate. You might want to check with them.

Ruger
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Joined: Fri Jun 09, 2017 9:44 pm

Re: Inheritance and ACA

Post by Ruger » Mon Oct 30, 2017 5:30 pm

MP123 wrote:
Mon Oct 30, 2017 5:11 pm
Ruger wrote:
Mon Oct 30, 2017 5:03 pm
MP123 wrote:
Mon Oct 30, 2017 11:48 am
What form does this inheritance take? An inherited IRA for example may have required minimum distributions. If it's a regular old taxable account then you may owe capital gains tax on any increase from the date of death until you sell.
My understanding is that the items in the trust fund (individual stocks and bonds) will be sold. Cash will be distributed to the heirs. No IRA's are involved. So we each will be responsible for any capital gains taxes on what we receive, but my question was does that count as income for ACA? It looks like it will.
Capital gains will count towards ACA.

But I would think your trustee would pay tax from the trust prior to distributing to the heirs and closing the estate. You might want to check with them.
Accountant said that the tax rate would be lower if we each paid individually rather than having the estate pay it.

Spirit Rider
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Re: Inheritance and ACA

Post by Spirit Rider » Mon Oct 30, 2017 7:39 pm

Ruger wrote:
Mon Oct 30, 2017 5:30 pm
Accountant said that the tax rate would be lower if we each paid individually rather than having the estate pay it.
That is correct and as has already said, securities receive cost basis reset on the date of death. The only capital gains will be from the date of death until the date of sale.

Ruger
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Re: Inheritance and ACA

Post by Ruger » Mon Oct 30, 2017 7:48 pm

Spirit Rider wrote:
Mon Oct 30, 2017 7:39 pm
Ruger wrote:
Mon Oct 30, 2017 5:30 pm
Accountant said that the tax rate would be lower if we each paid individually rather than having the estate pay it.
That is correct and as has already said, securities receive cost basis reset on the date of death. The only capital gains will be from the date of death until the date of sale.
Thanks, that is what I needed to find out. Hopefully won't be enough to push me off of ACA for the year.

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celia
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Location: SoCal

Re: Inheritance and ACA

Post by celia » Mon Oct 30, 2017 9:18 pm

Ruger wrote:
Mon Oct 30, 2017 10:27 am
As an aside, this is money I potentially plan to live off of so I can avoid digging into my retirement funds until
I turn 70 and get forced into RMD.
A suggestion for you so you don't end up surprised with what might happen down the road... Have you projected the value of the tax-deferred accounts when you turn 70.5? Then calculate the RMD, which starts at 3.65%. What will the RMD that you calculate do to your taxes (on top of SS, pension, wages, dividends, capital gains...whatever you plan to have at that time)? If your future tax bracket surprises you, you have time to make changes before it is too late.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

Ruger
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Joined: Fri Jun 09, 2017 9:44 pm

Re: Inheritance and ACA

Post by Ruger » Mon Oct 30, 2017 11:20 pm

celia wrote:
Mon Oct 30, 2017 9:18 pm
Ruger wrote:
Mon Oct 30, 2017 10:27 am
As an aside, this is money I potentially plan to live off of so I can avoid digging into my retirement funds until
I turn 70 and get forced into RMD.
A suggestion for you so you don't end up surprised with what might happen down the road... Have you projected the value of the tax-deferred accounts when you turn 70.5? Then calculate the RMD, which starts at 3.65%. What will the RMD that you calculate do to your taxes (on top of SS, pension, wages, dividends, capital gains...whatever you plan to have at that time)? If your future tax bracket surprises you, you have time to make changes before it is too late.
I actually have started to look at that...I am going to get hammered when the time comes to do RMD since a large part of my investments are in taxable accounts. Fortunately after I pay taxes on what I have to withdraw I'll probably just reinvest the rest of it. As of now, and in the near future anyway, I live on less than what I bring in every year.
Thought about converting some to my Roth account but I'm limited as to how much I can convert before I push myself into a tax bracket (right now I don't pay any federal or state taxes). I'm not sure the total amount I could convert before hitting 70 is really going to make much difference since it would be a small percentage of my overall investments. But it's still something I am considering.

mnnice
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Re: Inheritance and ACA

Post by mnnice » Tue Oct 31, 2017 8:15 am

You are not going to get kicked off of ACA but you very well may not get any subsidy. :annoyed

If the trust was invested in equities and the person you are receiving the inheritance from has been gone more than a few months the capital gains could be in the solid five figures pretty easily as a function of the market returns we have had this year. Do you know the current holdings of the trust?

Spirit Rider
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Re: Inheritance and ACA

Post by Spirit Rider » Tue Oct 31, 2017 8:36 am

I just realized we were talking about a trust. What kind is it? If the trust irrevocably removed the assets from the decedent's estate, then the trust does not get a step up in basis.

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celia
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Re: Inheritance and ACA

Post by celia » Wed Nov 01, 2017 4:53 am

Ruger wrote:
Mon Oct 30, 2017 11:20 pm
Thought about converting some to my Roth account but I'm limited as to how much I can convert before I push myself into a tax bracket (right now I don't pay any federal or state taxes). I'm not sure the total amount I could convert before hitting 70 is really going to make much difference since it would be a small percentage of my overall investments. But it's still something I am considering.
Then, you should compare your current tax bracket (0%??) with the tax bracket you will be in at age 70+. No use being in the 0% bracket from now until age 70, then be in the 25% bracket after that. If it looks like that would happen, it may make more sense to be in the 10% or 15% bracket for all the years instead.

Ruger
Posts: 150
Joined: Fri Jun 09, 2017 9:44 pm

Re: Inheritance and ACA

Post by Ruger » Thu Nov 02, 2017 4:45 pm

mnnice wrote:
Tue Oct 31, 2017 8:15 am
You are not going to get kicked off of ACA but you very well may not get any subsidy. :annoyed

If the trust was invested in equities and the person you are receiving the inheritance from has been gone more than a few months the capital gains could be in the solid five figures pretty easily as a function of the market returns we have had this year. Do you know the current holdings of the trust?
I know the entire estate is 2 million to be divided between five of us. I don't know how much of that was originally in the trust vs how much was added to it after all accounts were consolidated into it. I know it was heavily weighted in stocks. At least there will be five of us to split any capital gains so maybe it won't be too bad. Person we are inheriting from passed away in February, so I know there could be five figures of capital gains.

Yeah, I won't get kicked off ACA but the subsidy may be gone for the year. Guess that's okay if it happens considering the inheritance is a lot more.

Ruger
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Joined: Fri Jun 09, 2017 9:44 pm

Re: Inheritance and ACA

Post by Ruger » Thu Nov 02, 2017 4:47 pm

Spirit Rider wrote:
Tue Oct 31, 2017 8:36 am
I just realized we were talking about a trust. What kind is it? If the trust irrevocably removed the assets from the decedent's estate, then the trust does not get a step up in basis.
I don't know much about it other than it's an AB trust.

Ruger
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Joined: Fri Jun 09, 2017 9:44 pm

Re: Inheritance and ACA

Post by Ruger » Thu Nov 02, 2017 4:49 pm

celia wrote:
Wed Nov 01, 2017 4:53 am
Ruger wrote:
Mon Oct 30, 2017 11:20 pm
Thought about converting some to my Roth account but I'm limited as to how much I can convert before I push myself into a tax bracket (right now I don't pay any federal or state taxes). I'm not sure the total amount I could convert before hitting 70 is really going to make much difference since it would be a small percentage of my overall investments. But it's still something I am considering.
Then, you should compare your current tax bracket (0%??) with the tax bracket you will be in at age 70+. No use being in the 0% bracket from now until age 70, then be in the 25% bracket after that. If it looks like that would happen, it may make more sense to be in the 10% or 15% bracket for all the years instead.
Yep, 0% right now (well, I did have to pay one dollar to the state, lol).
Correct, I need to figure out over all which works best. In another year and a half I'll be on Medicare and then I won't have to worry about keeping my MAGI down for the subsidy.

gotlucky
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Re: Inheritance and ACA

Post by gotlucky » Thu Nov 02, 2017 11:21 pm

Can't he choose to have distributions in-kind?

If so, he should take shares with the original cost basis. Then he can decide when to sell and recognize the gain. Or perhaps he can donate some of them and deduct the fair market value, which would lower his MAGI.

Spirit Rider
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Re: Inheritance and ACA

Post by Spirit Rider » Fri Nov 03, 2017 12:11 am

Ruger wrote:
Thu Nov 02, 2017 4:49 pm
Yep, 0% right now (well, I did have to pay one dollar to the state, lol).
Correct, I need to figure out over all which works best. In another year and a half I'll be on Medicare and then I won't have to worry about keeping my MAGI down for the subsidy.
No then you just have to worry about your MAGI for Part B and Part D IRMAA. Of course except for higher income taxpayers it is nowhere near the cliff levels of ACA subsidies.

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