Liz Weston Warns $1 Million Bequests to Minors Can Backfire Under Kiddie Tax

1 articles · Updated · OregonLive · Jul 11

$1 million inheritances routed to young children may not cut taxes on inherited retirement accounts because unearned income above $2,700 is generally taxed at the parents’ rate under the kiddie tax.
Retirement-account timing also works against the strategy: when minors inherit from someone other than a parent, the 10-year withdrawal clock starts immediately rather than stretching until age 21.
$3 million in retirement funds can be especially tax-inefficient because those accounts get no step-up in basis at death, unlike taxable assets whose capital gains can be wiped out.
Weston cites alternatives including spending down retirement accounts first, converting some assets to Roth IRAs if the parents are in a lower bracket, or using trusts to delay distributions beyond age 18.
Those options carry trade-offs—trusts can face complex rules and high tax rates—so she says the family should consult both an estate-planning attorney and a tax professional.