Inherited IRA
Does The Pension Protection Act of 2006 allow me to pass my IRA to my children without treating it as part of my estate?
In other words, if I die and leave my IRA to my children is the inherited IRA treated as part of my estate, in regards to the applicable exclusion limit, or the amount that I can leave tax free to them.
Permalink Submitted by Alan Spross on Mon, 2008-03-31 20:03
The Pension Protection Act did not affect the calculation of a gross estate, and therefore the portion of an IRA passing to your children is included in your gross estate. The unified credit is 2,000,000, rises to 3.5 MM in 2009, disappears in 2010 and there is no sense speculating beyond that since Congress will certainly make more changes, probably well before 2010.
Your state may also have an inheritance or estate tax at lower gross estate levels than the federal limit, so that situation also needs to be considered.
If federal estate taxes are due on your estate, the portion of those taxes attributed to IRAs will be available to the IRA beneficiaries as a potential miscellaneous itemized deduction. That would help them offset the income tax on their IRA distributions to a certain extent.
Permalink Submitted by Steve Glasgow on Mon, 2008-03-31 20:27
Thanks so much for your reply. That was my biggest fear.
So in essence if I’m worth more than the exemption what ever it is at my death, my IRA will be taxed twice.
Is this correct?
Permalink Submitted by Bruce Steiner on Mon, 2008-03-31 22:34
Yes and no. Like your paychecks, if you receive them during your lifetime, you pay income tax when you receive them, and the balance after income tax (except to the extent you spend it during your lifetime) becomes an asset of your estate and is subject to estate tax. IRA benefits at death (or your last paycheck after your death) are included in your estate for estate tax purposes. To mitigate the double tax, the recipient gets an income tax deduction for the Federal estate tax paid on them, at marginal rates.
Permalink Submitted by Steve Glasgow on Mon, 2008-03-31 23:31
Thanks, but you are not making me feel better.
Permalink Submitted by Alan Spross on Tue, 2008-04-01 00:06
Well, perhaps you would feel better if Congress brought some stability and transparency to the unified credit, so that any changes were made a couple decades in advance rather than every 5 years. That results in plans having to be amended and re visited far too often, and this does not come cheaply. Only a guess, but I would expect that the next revision would result in the credit being at least 3.5MM (the 2009 level), and probably higher. On the other hand, total elimination now appears completely off the table for both political and deficit related reasons.
The higher unified credits are also being eroded by states trying to replace their lost share of the federal estate tax by their own inheritance and/or estate taxes, at a much lower level. Therefore, a retiree that moves may have to consider this for the new state. There is no IRD deduction for state inheritance or estate taxes paid.
Permalink Submitted by Al Fry on Tue, 2008-04-01 00:07
Married couples dying in 2009 can pass $7 million estate tax free to heirs. It looks as if this may become permanent. Al
Permalink Submitted by Al Fry on Tue, 2008-04-01 00:08
Married couples dying in 2009 can pass $7 million estate tax free to heirs. It looks as if this may become permanent. Al
Permalink Submitted by Steve Glasgow on Tue, 2008-04-01 10:29
Unless a married couple died together wouldn’t you need some kind of AB trust to pass 7 million tax free in 2009.
The 2009 limit of 3.5 million each would be great, but if nothing is done it will be 1 million in 2010.
Can anyone recommend a good estate attorney in Charlotte,NC?
Permalink Submitted by Alan Spross on Tue, 2008-04-01 22:59
You are right about the by pass trust. Without it, if more than 3.5mm are accumulated by the surviving spouse, the survivor will then have a taxable estate.
Permalink Submitted by Al Fry on Wed, 2008-04-02 14:05
A bypass trust can be used, but as Bruce points out, $3.5 million can also be paid directly to non-spouse heirs, as well. On that size estate, a trust may make more sense. I feel very confident Congress will fix this regardless of who gets elected as President. They would all look very foolish if they didn’t. Al
Permalink Submitted by Janine Janine on Sat, 2008-04-05 01:59
[quote=”[email protected]“]Unless a married couple died together wouldn’t you need some kind of AB trust to pass 7 million tax free in 2009.
The 2009 limit of 3.5 million each would be great, but if nothing is done it will be 1 million in 2010. [/quote]
I believe that you mean if nothing is done it will revert to 1 million in [b]2011[/b]. If nothing is done in the interim, very unlikely, there will be [b]no[/b] estate taxes in 2010.