Smart Money Podcast: Pandemic Savings Goals and Taxes on Inheritance

Sean Pyles: Welcome to the NerdWallet Smart Money podcast, where we answer your personal finance questions and help you feel a little smarter about what you do with your money. I'm Sean Pyles. To send us your money questions, call or text us on the Nerd Hotline at 901-730-6373. That's 901-730-NERD. Or email us at [email protected].

This episode, my co-host Liz Weston and I answer a listener's question about taxes on the sale of an inherited home. But first, I'm talking with banking Nerd Chanelle Bessette about all the money folks have saved during the pandemic and what they're planning to do with it. Hey, Chanelle, welcome onto the podcast.

Chanelle Bessette: Thanks Sean, it's great to be here.

Sean: So NerdWallet recently partnered with Marcus by Goldman Sachs for a survey about how people saved money during the pandemic, and what were the key findings?

Chanelle: They found the pandemic was spurring some people to save more. We found that 87% of the Americans surveyed were saving for something.

Sean: OK. Interesting. I think that makes sense, because so many people weren't able to travel, go out to restaurants. We hear from a lot of listeners who were saving a lot more because their expenses were less, and some people were actually able to make more during the pandemic.

Chanelle: That's true. There's a lot of disparity between how people were able to work and save during this time.

Sean: Mmm hmm.

Chanelle: But for the ones who were able to save, they were able to cushion their savings quite a bit.

Sean: Right, that was really the story of 2020 and our economic recovery going into 2021 — the way that our economy became bifurcated between those who are working more and able to save more and had fewer expenses, and those who were out of work and ran through their savings.

Chanelle: Right, exactly.

Sean: And it's interesting, because for a long time many Americans pretty seriously struggled to build up savings. There was a stat that many Americans couldn't come up with $400 in an emergency. But that did change dramatically during the pandemic, and interestingly, the NerdWallet-Marcus survey found a lot of people had a goal for their savings. So what were the top goals?

Chanelle: The No. 1 goal was to save for an emergency, so about 39% of the respondents were saving for that. Then the second top goal was general savings; it was 38%. Then saving for retirement came in at 36%, and then travel or vacation was 31%. So I think that last one is very telling. People have seen the light at the end of the tunnel, and they definitely knew that someday the pandemic would be over and that they wanted to do something fun.

Sean: Right. I think all of these different savings categories have their own lesson in them. People saw how much an emergency can shake up your life, and in the case of many who ran through their savings, they needed to shore that back up or even just put what they were able to save into an emergency fund, something like that. It makes sense, because savings goals are so forward-looking that a lot of people want to secure their nest eggs, and also, as you mentioned, people are looking ahead and planning for the aftertimes.

Chanelle: In addition to traveling, I'm sure people are saving money to maybe go to music festivals, even just fun things that involve other people in their hometown. I remember I went to a plant nursery during the pandemic, and the guy who was working there told me that people are spending an incredible amount of money on plants instead of going out and traveling.

Sean: Myself included. But it's nice because we were able to make our home a little bit more comfortable, and I got a beautiful backyard out of it, and it also helped pass the time, which was much needed during the pandemic.

All right, well, I want to talk now about where people are saving their money. On the Smart Money podcast, we talk a lot about how much we love online savings accounts. Were folks taking advantage of those when they were building up their savings?

Chanelle: So about one in five savers that were surveyed opened an account at an online-only bank during the pandemic. However, we found that brick-and-mortar banks are still the most popular. Out of the Americans surveyed, about half of them have a savings account with a brick-and-mortar bank, whereas 25% have savings accounts at an online-only bank.

Sean: That is really surprising to me because, thinking about how much time people were spending at home and online during the pandemic, to me it would seem natural that folks would want to gravitate toward online banks, because they are that much more accessible. Not to mention the fact that they do tend to have higher APYs (average percentage yield, or interest) — even though, as we know, those have gone down a little bit over the past year.

Chanelle: Right. It is a low interest environment that could be affecting people's decision-making. Generally speaking, on the Banking team, we evaluate the banks that we cover and their APYs, and they aren't as great as maybe they were before the pandemic, but they're still quite higher than the average brick-and-mortar bank. So that's why we found the results surprising as well. We do think that age might have something to do with it. So millennials were most likely to open an online account. About 35% of them chose online-only banks in the survey, compared to 23% of Gen Xers and 8% of baby boomers. The main reason that people seem to like online-only banks is because of the convenience and higher interest rates.

Sean: That's exactly why I chose one, so that makes sense to me. And many Americans also changed the way they manage their money during the pandemic, whether it was due to job loss or just the sheer boredom of sitting at home for a year straight. And the survey looked into financial actions that folks took during the pandemic. What did it find?

Chanelle: So the pandemic was a shock for a lot of reasons and, understandably, it did create a lot of financial stress for people who lost their jobs or had their hours cut, or maybe had to become full-time caretakers for kids. We saw that a lot of women left the workforce, and according to surveys done at the end of 2020, a lot of economists are looking at the economic recovery as being K-shaped. So for people who did have job issues or hours cut or less income, there is a bit of a downward trend in their financial stability and savings. But on the flip side, for people who haven't had their income as affected by the pandemic, as you mentioned, there has been an upward trend. People have been able to save by not traveling or commuting to work or going out to restaurants or in-person shopping.

So for people who have the privilege of being able to be in that position, there's been an uptick in the amount that they've been able to save. So about 39% of savers say that they opened a new account since the pandemic began; 22% opened with an online-only and then 23% went with a brick-and-mortar bank. So as we were talking a minute ago, there is a little bit of disparity between online-only and brick-and-mortar banks, but overall, the fact that people are opening more savings accounts — that's pretty noteworthy. So a majority of the Americans surveyed, 78%, reported that the pandemic spurred them to take some sort of financial action around their savings. So it's been a whirlwind. So people who are able to save, saved more, and people who can't, they've been struggling.

Sean: That makes sense. And it's really interesting thinking about where we are right now. We're really at this inflection point. Even thinking about vaccines, we're at this point where we're about to go from having a lot of demand and not enough supply to just the opposite. And I think that as things begin to open up and people are really eager to travel and go out to restaurants and spend money at all of the service industry businesses that they weren't able to spend money at, I'm hoping that those folks who were most affected, who were in the bottom part of the K-shaped recovery, begin to see that steady out a little bit, as well as folks getting more financial assistance from our government. So maybe that's just me being optimistic here, but I'm hoping that we'd begin to see this inequity close a little bit.

Chanelle: I remember hearing that a lot of people were stashing away their stimulus payments instead of spending it in the economy just because they had their savings maybe depleted or didn't have any to begin with. Yeah, with things opening, hopefully that means people will want to spend more.

Sean: Well, maybe in the future we can have an update on this survey and we'll see what folks are doing with the money that they're earning and saving then. All right, well, do you have any advice for savers and would-be savers?

Chanelle: Yes, I would say probably the quickest thing you could do is look for a high-yield savings account to put your money in. Beyond that, depending on the level of motivation, looking at widening the gap between income and spending is huge. And even though it's not always convenient or easy to up your income, that is one of the best ways to be able to save more, because you can save the difference between your income and spending. Beyond that, tracking your income and expenses so that you have an idea of where your money is going, and then seeing where you can cut back, can be huge.

A lot of people look to NerdWallet's budgeting app as a way to help do that, but there are a lot of options out there. Or there's the classic spreadsheet, if you want to be a bit more hands-on. Finally, I would say, talk to your employer about redistributing your paycheck so that you can have part of it directly deposited into your savings account.

I personally do this. It's great to never see the money hit my checking account. So that way I don't feel tempted to spend it.

Sean: Right.

Chanelle: Ideally, even put it away at a different bank from your checking account so it becomes even harder to tap into it. That can be wildly helpful.

Sean: Yeah, that's actually what helped me get into the habit of saving, because in the beginning, saving has to be a really intentional choice when you're not used to doing it. And then once you find a way to automate it, it becomes so easy that you don't really think about the money that you're putting into your savings account, because you've established that habit, you're paying yourself before you're buying other things, and you will thank yourself in the future.

Chanelle: Yes, definitely.

Sean: All right. Well, Chanelle, thank you so much for talking with me.

Chanelle: Yes, thanks for having me, Sean.

Sean: All right. And before we move on, I want to do a callout for our listeners. I'd love to hear how you approach saving during the pandemic. Did you save more? And if so, what was your goal? Let me know by emailing [email protected] and hitting us up on the Nerd Hotline at 901-730-6373. That's 901-730-NERD. And with that, let's get on to this episode's Money Question conversation with Liz. This episode's Money Question comes from a listener's voicemail. Here it is:

“Hi, Sean. If you inherit a home and you sell it for $25,000, do you have to pay the IRS on the taxes? Thank you.”

So our listener directed this question toward me, but Liz is really the one who knows about inheritance tax, in and out, and estate planning and all these complicated things. So on this episode of the podcast, I'm going to be peppering Liz with questions to find out the answer to this question. So Liz, let's just dive into it. I know that taxes on inheritance are a complicated and often misunderstood topic. What do you think our listeners should know?

Liz Weston: Well, the flip answer is, you should be so lucky to worry about this issue.

Sean: True.

Liz: The fact is very, very, very few people have to pay gift taxes, estate taxes, inheritance taxes, what they're calling death taxes in general. This is something that you don't face until you either have or have given away millions and millions and millions of dollars. Right now, you'd need to give away $12 million, nearly, to even have to worry about gift taxes. So it's not something that most people are going to run into.

Sean: And if you're selling a house for $25,000, that is not anywhere near the multimillion-dollar threshold that you would have to hit to owe taxes on it, correct?

Liz: Yeah. And for the most part, the people who inherit don't pay the tax, even if there were taxes owed, even if the house was $25 million instead of $25,000. Typically, it would be the rich person's estate that would pay the taxes.

Sean: OK.

Liz: And then you would get the house and you could sell it right away, and you would owe no taxes. And this reveals a hidden tax benefit that isn't talked a lot about when people talk about death taxes, and that's the step-up in basis.

Sean: So this is where we enter the world of complicated jargon around inheritance and taxes and all of this. So can you explain what the step-up is?

Liz: Yeah, and it does get confusing. So let's say that you have a share of stock and you bought it at $10 and you sell it for $100. That $90 of growth, that $90 of earnings, that's going to be taxed typically at capital gains rates. So the $10 is your tax basis. Now, the cool thing is, when you inherit something, you don't have to worry about the growth that happened during the other person's lifetime. So let me turn it around: Let's say your parent spends $25,000 to buy a house, you inherit it, it's now worth $250,000. All that gain is never taxed. You get the house, you can sell it for $250,000. You don't owe any capital gains tax.

Sean: Right.

Liz: Your parent didn't pay any estate tax. So essentially all that growth happens tax-free.

Sean: That's pretty handy. And this term “step-up in basis” confused me for a little bit. I was trying to wrap my head around what it actually referred to and how these words relate to what's actually going on here. And, for me, it helped to think about when you're being given this property or stock, house, whatever it may be, in the act of it being given to you, the value is being stepped up from what it originally was to what it is currently and you don't owe that difference.

Liz: Yes, that is a very good way to put it. Now, one thing we should be very clear on is that to get that step-up in basis, you need to have inherited the property. So somebody needs to have died and given it to you. If they give it to you during their lifetime, you don't get that step-up. So say your mom decided, "Oh, I'm going to put you on this house. I'm going to give you my house," now you have her basis. So you're back to having it for $25,000, which is why it's super, super, super important before you accept a gift like this, before any property is transferred while the owner is still alive, go talk to a tax pro. I know so many people who could have saved a lot of money if they just waited a bit and gotten it as an inheritance rather than as a gift.

Sean: That is confusing to me about this entire process of inheriting a home and then selling it and where the taxes are or aren't owed is the process around that. So you get the home and then you wouldn't be taxed on that home itself, but then say you have it for five years and then you want to sell it at that point. I guess I'm wondering if inheritance taxes or anything would apply to that, or if the sale of it is really just you selling a house and that's totally separate from how you even came into it?

Liz: It's pretty much separate. Once you've inherited the house, now you have that stepped-up basis.

Sean: Mmm hmm.

Liz: OK, let's say you sell it five years later, it's increased in value by $50,000. Then the $50,000 would be the basis of what you pay tax on. So you'd pay tax on that gain, but you wouldn't pay tax on the gain that happened during your mom's lifetime.

Sean: OK, got it.

Liz: I just want to throw in, because I didn't deal with this earlier, is we've been talking about inheritance taxes and that's actually a whole separate thing. There are a handful of states that do tax inheritors. I was saying how the estate is usually the one that pays the tax, or in the case of a gift, it's the giver — if somebody gives away $12 million in their lifetime, then they have to pay tax. The one case where inheritors may owe taxes is if they live in one of those handful of states, and the states will tax the inheritance, and the amount you pay tends to increase the more distantly related you are. So if the spouse inherits, there's no inheritance tax. If you are a distant cousin or a friend, then you might owe a larger amount of tax. But, again, this is only a few states. It doesn't apply to most people.

Yet another exception: There is an annual gift exemption limit, and right now that's $15,000. And what that means is that you are allowed to give $15,000 to an unlimited number of people before you have to file a gift tax return. That doesn't mean you're going to have to pay gift taxes on larger gifts. It just means you're supposed to file a gift tax return. Once again, you'd have to give away, I think, $11.7 million over that $15,000-per-person annual limit before you'd even have to worry about this.

Sean: Right. And if you're dealing with these huge sums of money, you likely are hiring someone anyway to manage your finances for you.

Liz: Exactly. If you have any questions about gift taxes, please talk to a tax pro. They can clear up a lot of these mysteries for you.

Sean: Yes, that is always very solid advice when it comes to something as complicated as this.

Liz: Yes.

Sean: But there's another area of death and inheritance that we get a lot of questions about and there's a lot of confusion about, which is whether you can inherit your parents' debts.

Liz: Oh, yeah.

Sean: And what are people often thinking and what is the reality here?

Liz: OK. The reality is a lot of people die without much money. So I think I saw one study that said almost half of elderly people die with less than $10,000 in assets, not including their house. So there's a lot of people who simply die broke or they die deeply in debt and their heirs are worried, “OK, who's going to pay this bill?” The way it's supposed to work is that the creditors line up and if the estate has enough money, then it's parceled out to those creditors. So if there's anything left over, that's what goes to the heirs. If there's not, well, the heirs and the creditors are out of luck. So if the creditors don't get fully paid, there's nobody that they can go after.

Sean: But the creditors get precedent?

Liz: Yes, the creditors have to be paid first. It's basically your funeral costs have to be covered, and then there's a bunch of other death-related stuff that has to be paid for. And then the creditors all line up. They have certain levels of precedence depending on who they are. So it's only after they get paid that the inheritors get anything, assuming that there weren't things going outside the estate. If somebody has life insurance and there's a beneficiary, that actually passes outside the estate and there's nothing that the creditors can do about it. But most of the time when we're talking about parents who are deeply in debt, there's no money. There's nothing going outside the estate. It's just not enough. Typically, if that's your situation, if your parents died with a lot of debt, you don't have to worry about it, because once the estate is settled, it's done.

Sean: But there is an exception to this, and that is generally if you have co-signed on a loan with your parents, is that correct?

Liz: Yeah, that's it. There was another exception that had to do with overpayments of Social Security. There were some children who essentially were having their tax refunds withheld because the parents didn't pay that money back. Again, these exceptions are few and far between, and I would definitely talk to an attorney if you're worried about any of this, because it can get pretty complicated.

But in general, no, you can't inherit most of your parents' debts.

Sean: That's a relief, for sure. Are there any other common misconceptions that you hear around inheriting either money or debt from people?

Liz: I think the thing that people should keep in mind is that if you are receiving a gift, you are free and clear. Even if the giver is so rich that they have to worry about gift taxes, that's not your problem. You can just take the money and run. So that's something to keep in mind.

But there is that issue with the step-up in basis. So if you are getting anything other than cash, you want to talk to a tax pro about how to treat that.

Sean: One thing that's so funny about this, and I think why people are so concerned, is that they're used to anything that is good financially being a trap in some way. But this is one of those rare instances where there actually is some good news here that you won't owe money.

Liz: Yeah, exactly. There is a free lunch, occasionally.

Sean: Even if it does come with the loss of a loved one, which is a pretty big price to pay, I'll say.

Liz: One of the things that's surprising is that there can be a lot of guilt. There can be a lot of regret attached to inheritances.

Sean: Mmm hmm.

Liz: And people don't get a lot of support for that. I mean, people think, "Oh, you're so lucky you inherited all this money," or you inherited any money, but there's some emotional baggage that can come with that. So if that's a situation that you are facing, anybody who's listening to this, understand that it's very common. And again, we always want you to turn to expert help. So there are therapists who specialize in this if you need to work through some of these issues.

Sean: Money is probably the last thing that you're caring about when you've just lost a loved one.

Liz: Yeah, exactly.

Sean: That brings me to another topic I wanted to talk about, which was a recent column that you had around why you don't want to be an executor of an estate. And I found this really compelling and it made me quite scared about the prospect of this, but can you give us a simple rundown of why being an executor maybe isn't the most fun job in the world?

Liz: Yeah. A site called EstateExec that helps executors do their jobs did a survey and found that the typical estate takes 16 months to settle and requires 570 hours of effort.

Sean: Geez.

Liz: Yeah. If you're talking about larger estates, $5 million and above, then you're talking about 42 months and 1,167 hours of effort. Now, this is not saying that the executor is doing all this. I mean, hopefully with those huge estates, you're hiring other people. Even with smaller estates, you need to hire some help. But it's a lot of work, definitely.

Sean: Well, this makes me think about whether folks who are doing this did or did not have wills, which we know can be a very complicating factor if people did not have a will set up. I'm thinking of Aretha Franklin's estate right now, which was such a mess because there wasn't a will.

Liz: Yes, not having the right estate planning documents in place can really make things worse. But even with a well-organized estate, there is a lot to do. You need to track down all the assets, you need to notify all the creditors. You need to make sure that things are properly appraised, and then you have to sell stuff. So it's not a quick process for a decently sized estate, and you need to know that going in. Also, something that people really don't understand is that, as the executor, the buck stops with you. So if there is a mistake, if you pay out people that you shouldn't or you later find out there's a tax bill that didn't get paid, it could come out of your pocket.

Sean: Oh, geez.

Liz: On top of that, if you are helping with an estate where there are a lot of heirs in conflict, that there could be lawsuits, you can get sued. Somebody might second-guess your decisions and decide to haul you into court. So this is no small thing. It's a big job, and you need to understand what it is. But you know, I say you don't want to do it, but it really is an honor to be asked. They think that you have integrity. They feel that they can trust you. They are relying on you to put the estate and the beneficiaries first, to put their needs and their best interests ahead of your own. It's a big honor, but it's also a big task.

Sean: I'm wondering if this would be something that would be best allocated to a trusted attorney versus someone who you maybe care about a lot, but isn't well-versed in the ins and outs of something like this.

Liz: If I were looking for an executor for my own estate, I would look for the most trustworthy person in my life. I would approach them and make sure that they're up for this, and then I would encourage them to hire help, to hire a good attorney, and to hire an accountant, and to hire everybody else that they need, because all those people can be paid out of the estate.

Sean: And hopefully that can reduce some liability or stress.

Liz: Exactly. Now, if there is a situation where you've got lots of contentious heirs, there's going to be huge problems, and you have a lot of money, which is what usually causes all the heirs to go nuts, then you might want to look at a professional to do this. And there are professionals who do it. Sometimes it will be an attorney, sometimes it will be a financial planner, but there are people who specialize in doing this work. Some of the stories that I hear from estate planning attorneys and from financial planners are almost unbelievable. But if you have a family, you probably can relate somehow.

Sean: Mmm hmm.

Liz: A lot of times it brings out the worst in people. I was talking to one financial planner who had a family that just fell apart over a Tinkertoy, literally. Everybody wanted the Tinkertoys, and this huge fight blew up over them. So sometimes it's not even the really valuable stuff that causes the problems. It's the stuff that people just remember from their childhood and everybody decides they want it.

Sean: Sentimental value.

Liz: Exactly.

Sean: All of this seems like a good premise for a soap opera that I would love to watch.

Liz: Just not live through, right?

Sean: Yes, please. No, thank you. With that, I think that we can get on to our takeaway tips, and I'll kick us off this time. First up, you probably aren't rich enough to worry about estate or gift taxes. People who pay these taxes generally have or give away millions of dollars.

Liz: Next, how you receive the property could determine your future tax bill. Talk to a tax pro or an attorney before any property is transferred.

Sean: Lastly, you typically can't inherit your parents' debts, but there are a few exceptions.

Liz: And that's all we have for this episode. Do you have a money question of your own? Turn to the Nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at [email protected]. Also, visit nerdwallet.com/podcast for more info on this episode, and remember to subscribe, rate and review us wherever you're getting this podcast.

Sean: And here is our brief disclaimer, thoughtfully crafted by NerdWallet's legal team. Your questions are answered by knowledgeable and talented finance writers, but we are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances.