This is how backdooring your parents would work. Instead of contributing to a taxable brokerage account, you gift the money to your trustworthy elderly of choice. They use the gifted money to fund a taxable brokerage account and buy investments (maybe you get power of attorney so you can make investment decisions for them). They die (rest in peace) and because of stepped basis, you get tax free growth on the investments, thus turning your parents into a mega backdoor and most likely before retirement age.
Is there anything Iâm missing? It seems to be a viable method for an early retirement with tax advantaged investments.
Anyone want to invest in an EaaS (Elderly as a service)?
Once you gift it to your parents, itâs their money. Even if the ultimate intent is for it to head back to you, there is nothing you can really do to stop them from spending it.
As that money is in an ordinary investment account, it would not be protected from their creditors. A major health or home related cost or lawsuit against them could wipe some or all of it out.
Scams preying on seniors are a real thing. If your parents get tripped up by one, that money could be lost.
Especially if there are multiple children, former spouses, or a chance that a surviving spouse may remarry, that money may end up being split to different beneficiaries based on an estate plan or account titling that doesnât meet the original intent of that initial gift.
Even if all else holds to plan, the timing uncertainty on this idea is substantial. For instance, on my motherâs side, my grandmother lived into her 90s, while my grandfather passed away around age 65.
Net - while the theory looks potentially promising on paper, the paths to potential pitfalls are substantialâŚ.
Well, if you get the parents when theyâre old enough and easily confused, you set it all up and then tell them it didnât go through and doesnât exist, and you handle everything yourself, unbeknownst to them.
At the end father in law was paying $15k/month for care. He didnât run out of money but suspect that Medicaid would be searching for payback if he had and they were paying his bill.
I see someone contesting the will that leaves you all of that money as an issue. Or if they were TOD accounts, the âtrustedâ elderly person deciding to change the beneficiary on those accounts. Or the trusted elderly person causing an accident that injures someone significantly and being sued for âtheirâ assets. Or them needing long-term care and âtheirâ assets being required to be used to pay for the care.
What if we set up the investment account in an Irrevocable Trust for the benefit of the young retiree. If thereâs a danger that the elderly person will go on Medicaid, you could discontinue new deposits ahead of the 5-year look back period (30 month look back period in New York & California.)
I believe that the Irrevocable Trust would be safe from any court judgements if it had be set up prior to the accident you are being sued for. Also, an Irrevocable Trust is not part of the deceasedâs Probated Estate.
There may be a problem if the trust is generating taxable income since the tax rates on trusts tend to be high, but you could solve that by investing in something that doesnât produce income like BRK. Also an Irrevocable Trust wouldnât benefit from the tremedous gift of the stepped-up cost basis on death, which is the foundation of generational wealth in America. Perhaps one would be willing to accept some risk to get in on the stepped-up cost basis grift?
Irrevocable trusts donât get a step up in basis, which I thought was the point of what you were pushing?
Oh, so now you can project who will need Medicaid in 2 1/2 - 5 years?
You are welcome to do so, but seems like a lot of dodging for not much gain. At most, capital gains taxes are going to be 23.8%, which is a lot lower than you would be paying in ordinary income taxes with that amount of income.
The other issue is the initial transfer of money to the elderly person. Without reducing your estate tax exemption, you can only gift up to $18k a year (if you have a spouse, they can gift another $18k, and if the elderly person has a spouse, another 2 x $18k). But you wonât be able to gift a few million very easily to enable a substantial step up of basis at death.
A second problem is that elderly people die quicker than non elderly people, so there arenât all that many more years for capital gains to accrue, and thus be stepped up at death.
These along with all the other aforementioned pitfalls makes this strategy less useful. Maybe it could work for smaller numbers, and when there is only one child inheriting everything (which reduces the chance of squabbling).
Separate accounts have no bearing on the total estate. One account with $100k (INTC), one account with $200k (AXP), and one account with $700k (NVDA), upon death, the estate is $1M. Three kids inheriting will each get $333.3k. If they insist on one kid getting $100k, one getting $200k, and one getting $700k, there will very often be squabbles. Then the lawyers take half and the kids get half.
So you are suggesting setting up 3 different irrevocable trusts? That seems like it will be expensive. Or are you just suggesting setting up 3 different TOD accounts, with each kid the beneficiary on a different account?
Because the irrevocable trust loses the step up, and the TOD accounts are open to claims for paying creditors, long term care, etc.
The other thing to keep in mind is that the step up in basis really only becomes worthwhile after MANY years of gains. Sure, you could transfer assets to elderly folks and perhaps get 7-8 years of gains, or roughly a double, and with the step-up, save up to 23.8% on half the value. But the real HUGE benefit of the step-up happens after decades of holding, when almost the entire value of the asset is comprised of capital gains, then you can save up to 23.8% of the entire amount. But then you would have to be transferring those assets to middle-aged people to get those decades of tax free growth (stepped up growth). And for the vast majority, you CANâT transfer assets to middle aged parents because you donât have much in the way of assets at that point in life (because youâre still a kid or a young adult)!
Iâm not fond of - canât stand, really - any complex approach. KISS isnât exactly my mantra, but I find keeping things straight forward has worked best for me. If there are too many things to do, too many that depend on things going the way I expect them to, Iâm not interested.
So what are you doing about the issues with potential creditor claims, paying for long term care, or if the elderly person changes the beneficiary on the account?
A living trust is not an irrevocable trust. While a living trust can protect against creditor claims, the trust assets will still disqualify the elderly person from getting Medicaid to pay for long term care. Because a living trust is just that - living - the beneficiaries can also be changed, so you havenât solved for that risk either.
Still not seeing the point of this. It might be useful for a few edge cases, where people who have already maxed out both back door Roth IRAs and mega back door Roth 401(k)s and still have money left over to invest, and who wouldnât mind if that money went instead to, say paying for long term care for their parents or paying their parentsâ creditors. But, in general, the risk of losing 100% of your money vs. reward of saving a max of 23.8% of your gains doesnât seem to come down on the side of taking the risk, especially since your capital gains taxes can mostly be controlled to stay under that max rate.
Yes, itâs just another tool in the toolbox that people can consider or decline to use. Just like there were lots of skeptics on the wisdom of a 38-yr-old quitting a high paying engineering job three decades ago to leverage the much lower tax rates available to those in the Leisure Class without wage & salary income.