EaaS -- Elderly as a Service Backdoor Roth

[aj485]

@intercst

Yes, it’s just another tool in the toolbox that people can consider or decline to use.

You missed the part of my comment where I suggested what type of edge cases it might be useful for:

@aj485

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 wouldn’t mind if that money went instead to, say paying for long term care for their parents or paying their parents’ creditors.

Seems like a pretty bad tool for general usage.

AJ

[intercst]

@aj485

@intercst

If you’re doing a trust. Nolo will sell you state specific documents for $30.

A living trust is not an irrevocable trust.

You can get an irrevocable trust for $30, too.

intercst

[aj485]

@intercst

You can get an irrevocable trust for $30, too.

But since the point of this strategy is to capture the step-up to avoid capital gains taxes, that seems pointless.

AJ

[intercst]

@aj485

But since the point of this strategy is to capture the step-up to avoid capital gains taxes, that seems pointless.

I’m responding to your comment that getting a trust is expensive. Over the years I’ve noticed that many people on TMF seem to think it should cost thousands of dollars for a will or trust.

That was another thing I learned at age 18 when I took that 3-day financial planning course freshman year in engineering school. The Estate Attorney they had addressing the class wouldn’t give us a price for preparing a set of standard documents like a will, power of attorney, and medical directives saying that “every case is different”, but the class kept pressing him. Finally, someone said, “Well, what if it’s the standard case of a married guy with a house, a bank account and some savings in a mutual fund or brokerage account”. The attorney says “$1,500”, and there’s an audible gasp in the room. (This was 1975 when a top engineering grad might get a starting salary of $15,000/yr.) Everyone in the class looked at each other in disbelief. For the “standard case” he’s just spooling off the documents from the word processor and filling in the blanks, and he’s going to charge 10% of my annual income for that ??? I made a mental note to make sure I’m on the right side of that transaction in the future.

Minimizing the “skim” – the key to retiring early.

intercst

[aj485]

@intercst

I’m responding to your comment that getting a trust is expensive.

But you never answered my question about how useful an irrevocable trust could be since you lose the step up - yet even recognizing that, you suggested using irrevocable trusts. So again, what’s the point of an irrevocable trust for this strategy?

@intercst

Over the years I’ve noticed that many people on TMF seem to think it should cost thousands of dollars for a will or trust.

Even if I were to use an off the shelf template, I’d still pay an attorney to look at it. I wouldn’t trust NOLO, Suze Orman or any of those other outfits offering generic trust documents to actually do what I wanted it to do.

AJ

[intercst]

@aj485

Even if I were to use an off the shelf template, I’d still pay an attorney to look at it. I wouldn’t trust NOLO, Suze Orman or any of those other outfits offering generic trust documents to actually do what I wanted it to do.

Everyone has a different perspective of risk and reward. I’ve only hired an attorney if I plan to take someone to trial. The DIY paperwork I can do myself.

Actually having thought about this over the past 24 hours, I think the biggest risk of the EaaS strategy is that the IRS might deem it “tax evasion” where you are using a straw man (the elderly person) to get an undeserved stepped-up cost basis on your savings.

I wonder if anyone has gotten a Private Letter Ruling on it? (Of course, the IRS has jacked up the fees for a PLR, too) {{ LOL }}

[MCCrockett]

@MarkR

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 won’t be able to gift a few million very easily to enable a substantial step up of basis at death.

There is nothing in the tax code that limits gifts to $18K. This is only an annual limit to avoid completing IRS Form 709. If you are willing to fill out IRS Form 709, you are able to give $13.2MM.

[Daryll44]

You can give way more than $13.2M. As long as someone pays the gift tax.

[MarkR]

@MCCrockett

There is nothing in the tax code that limits gifts to $18K. This is only an annual limit to avoid completing IRS Form 709. If you are willing to fill out IRS Form 709, you are able to give $13.2MM

Yes, I am aware, BUT doing so would kind of defeat the whole purpose of avoiding taxes via step up of basis. If you use up (all or part of) your own unified estate tax credit the way you describe, and you are able to transfer millions of dollars to a decedent, and then allow years of capital appreciation go by, and then you use their step up in basis to save on capital gains taxes on a few million of gains. So let’s say you managed to save the capital gains taxes on $5M of gains. Now the parent that you used for their step up in basis has died, and you get let’s say $10M of assets. Now, you have many years yet to go, probably 30 or more before you die. That $10M will become close to $100M by your own death, add to that whatever other assets you accumulate over that time, and because you used up your own unified credit, you end up paying estate tax rates (40%) instead of long-term capital gains tax rates (23.8%) on that money!

The only exception to this that I’ve seen bandied about recently is that it may be worth using up the unified estate tax credit now while it is still high ($13.61M/$27.22M) because it is likely to decline on Jan.1, 2026 (to ~$7M/$14M). In other words, it is possible that you (a married couple) can exempt yourself from gift tax now on $27M of assets, even though the unified tax credit may go down in the future. But all tax professionals agree that if you use the higher amount now, and future tax code lowers the amount, it will mean that you have zero exemption at death. It’s the kind of thing you can only use once in a lifetime.

[intercst]

@aj485

Even if I were to use an off the shelf template, I’d still pay an attorney to look at it. I wouldn’t trust NOLO, Suze Orman or any of those other outfits offering generic trust documents to actually do what I wanted it to do.

I asked my attorney about that. And he confirmed that it would take more time to review a document prepared by others than to just spool off his standard documents from the word processor and fill in the blanks.

intercst

[MCCrockett]

To paraphrase an expression that a corporate attorney I once worked with used, I’m just a poor country software engineer.

My wife died in 2019 at age 72. My mother died in 2022 at age 100. My three children are named as equal beneficiaries on my traditional IRA. I’ve given each child the annual gift exemption each year but my IRA has managed to triple in value although I have been taking RMD since 2015.

My RMD withdrawals since 2015 have been placed in a taxable investment account held in a revocable trust along with all my checking and savings accounts and my parents’ home that I just bought. The purpose of the revocable trust is to reduce the cost of probate to my children. It is steep in California when you have over $163K (currently) in assets. At the moment, mine are zero.

[aj485]

@intercst

I asked my attorney about that. And he confirmed that it would take more time to review a document prepared by others than to just spool off his standard documents from the word processor and fill in the blanks.

Which is why I wouldn’t waste money on buying a template from NOLO, Suze Orman or the others pushing generic forms. It sounds like you paid for an attorney, too?

AJ