Tax consequence of disclaimed IRA going into a trust
I have looked through the discussion board to find an answer to this question and have found some very helpful information, but wanted to pose this question specifically in case I am comparing apples to oranges by relying on other threads.
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In order to maximize the benefit of an A/B Trust, my clients’ attorney has recommended that the wife be the primary beneficiary of her husband’s IRA, with language that allows her to disclaim whatever dollar amount is required to fill up the B Trust and take full advantage of the husbands estate tax credit (husband’s assets are almost completely in qualified funds, so if the wife doesn’t disclaim, they waste a big portion of the husbands credit and leave the wife with more funds than she might otherwise need).
Question 1: If the wife disclaims any part of the benefit, doesn’t that benefit pass directly to the contingent beneficiary? Would the B Trust need to be listed as the contingent beneficiary?
Question 2: If an amount is disclaimed by the wife and passes into the B Trust, wouldn’t this be a taxable event? If nothing else, wouldn’t this require a max stretch of 5 years for the purpose of income tax?
Note: the legal documents currently list the spouse as the sole beneficiary of both the A and B trusts that would be established at the husband’s death.
Thank you so much for your help. This forum is a very valuable resource!
Kyle
Permalink Submitted by Alan Spross on Tue, 2011-10-25 17:19
I doubt that this is even necessary under the current portability provisions of the estate tax. Or course, all estate tax provisions expire at the end of 2012 so perhaps this is still useful as protection against Congressional inconsistency and providing no long term assurance with respect to estate tax law. Under those current provisions, the unused portion of the decedent’s credit can be used by the surviving spouse. Eg. 5 mil unified credit, decedent leaves all to spouse and does not use any of his credit, and therefore the surviving spouse gets that 5 mil plus their own 5 mil = 10 mil.
Nonetheless, to address your questions:
1) Yes, a qualified disclaimer from the wife will result in the disclaimed amount going to the contingent beneficiary, which must be so listed as the IRA contingent beneficiary.
2) Not a taxable event because there is no IRA distribution. The disclaimed amount becomes an inherited IRA for the trust. The 5 year rule would only apply to the trust if two things occurred:
a) The trust was not qualified for look through treatment and most trusts are AND
b) The deceased spouse passed PRIOR to their required beginning date.
Permalink Submitted by Kyle Bigler on Tue, 2011-10-25 17:49
Alan,
Thank you so much for your reply. You are correct in guessing that the attorney was proceeding as if all bets are off after 2012. It was his opinion that combining the current (and potential future) political landscape with the current and mid-term fiscal state of the nation, the easiest way to increase revenue in a way that would appeal to the masses – and not be viewed as a new-out-of-the-blue tax hike – would be to let current estate law expire, resulting in both lower credit amounts (back to $1M) and increased marginal estate tax rates (back to 55%). He suggest that only about 2% of the population would feel the impact if no estate planning was in place (i.e. estate north of $1M), and only about .5% of the population would feel the impact if proper planning was in place (i.e. estate value north of $2M).
Anyway…thank you very much for taking a few minutes to post a reply. Greatly appreciated!
Permalink Submitted by Bruce Steiner on Wed, 2011-10-26 18:56
The spouse as primary beneficiary and a disclaimer credit shelter (bypass) trust as contingent beneficiary is a common plan for retirement benefits, for the reasons given.
Why is the spouse the only beneficiary of the credit shelter trust? Why give up the flexibility to make distributions to children and grandchildren, particularly since the spouse cannot have a power of appointment with respect to assets passing to the trust as a result of a disclaimer by the spouse?
I think it’s more likely than not that the estate tax exempt amount will settle at some amount higher than $1 million, and that portability will remain, but this plan protects against the possibility that the old law returns in 2013.