Tax consequences upon death of IRA owner & Spouse
I understood that upon my passing, my estate, through a Revocable Trust, which is essentially all in IRAs, would go to my wife, who had the option of disclaiming it, whereby it would pass to my children. Their “Stretch IRAs, would require RMDs based on their ages, and provide necessary income assistance for life to my wife.
I am now being told, that regardless of the estate tax exclusion credit in 2011, whatever it may be, my IRAs will be automatically subject to a 55% federal tax before they pass to my children, should I and my wife both pass away.
I am totally confused. Any help would be appreciated.
Jerry
Permalink Submitted by mk foss on Tue, 2010-11-02 03:26
I don’t think anything is certain regarding the federal estate tax but let me go over the rules as we know them now.
In 2011, the U.S. estate tax comes back with a $1 million exemption and a 55% maximum rate. The rates are graduated and the 55% rate will not be hit until the net estate is over $2.5 million or so. When the first spouse dies (owning more than $1 million of assets) and estate tax return is filed. There is a deduction for assets passing to the surviving spouse directly or in trust. The IRA would fall into this category.
When the spouse dies all of the assets are valued once more. A return is filed if they exceed $1 million. Expenses and liabilities are deducted from the assets and the tax rate schedule is applied to the net estate. If the estate is over $2.5 million a 55% rates applies to some of the assets. The tax is paid from whatever assets the executor chooses. The IRA is often the last asset that would be tapped to pay the estate tax.
Your explanation of your understanding of how this works was confusing. The gross estate for estate tax purposes includes all assets held directly and in trusts. IRAs cannot be in a revocable trust, although the trust can be the beneficiary of the IRAs. The spouse cannot disclaim IRAs unless she is named as the beneficiary, if the trust is the beneficiary – it takes more than just the spouse to disclaim. The usual recommendation is to name the spouse as the primary beneficiary of the IRA and the children as contingent beneficiaries. In that way the spouse can roll over the benefits, name the children to get the maximum stretch using each of their own life expectancies. There are many reasons to name trusts as IRA beneficiaries but if your primary concern is to get the maximum stretch, using the trust is complicated.
Permalink Submitted by Alan Spross on Tue, 2010-11-02 03:38
And if you think what Congress did last year by allowing the estate tax to expire was irrational, just think what a lame duck Congress may be capable of.
If there is a new unified credit, then you can determine whether there is a need for a bypass trust in order to use the exemptions of each of you, rather than having just one exemption available for the last spouse to pass who would then own all the remaining assets.
Whoever said anything about the 55% rate applying to your situation was automatic was likely making a large number of unwarranted assumptions.
Permalink Submitted by Gerald Rubin on Tue, 2010-11-02 12:28
Thanks All,
I believe you’ve set my mind at ease. My wife is the primary beneficiary of my IRAs, with my Trust as the contingent. I was being told, erroneously as I thought, that upon both of our deaths, the IRS would require 55% of my total IRAs, before they would pass to the children, via my Revocable Trust.
My Trust was last updated in 2000, and I was being told that the law changed in 2001, allowing for a 55% tax prior to any exemption. What you have indicated now, is what I previously understood.
Thanks, Jerry
Permalink Submitted by Alan Spross on Tue, 2010-11-02 19:37
If you pre decease your wife, the only ways the trust comes into play are:
1) Your wife disclaims all or part of your IRA and the disclaimed portion goes to the trust
2) Your wife names the trust as her primary beneficiary
3) There is a common disaster, and under your states adoption of the Uniform SImultaneous Death Act (and not specified otherwise in the IRA agreement), your wife is deemed to have pre deceased you, and therefore your IRA goes to the trust.
After Congress deals with the estate tax issue, you should re visit your estate planning in view of the chances, particularly the size of your gross estate or combined gross estate vrs the new unified credit.