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IRA Booby-trap. As all financial professionals are aware, IRA’s come with the income tax booby-trap attached.
That is, the plan owner (P) or the beneficiary (B), has to pay income taxes on the money withdrawn from the
IRA. For this purpose, we will use the generic term "IRA" to cover all tax deferred qualified plans, IRA’s, 401K’
s, Keogh’s, SEP’s, etc. (Roth IRA’s are excluded because there is no income tax due on withdrawals.)
Before the 2001 tax law amendments, raising the estate tax lifetime exemptions, one of the principal
challenges for tax and estate planners was to determine potential estate taxes on the IRA accounts, and then
determine who was responsible to pay such taxes. Now, with the increase in lifetime exemptions, attention is
shifting from the estate tax questions to income tax planning with respect to these plans.
Charities Are An Ideal Beneficiary. For clients who have any sort of charitable inclination, IRA’s are the ideal
asset to satisfy most charitable bequests and devises. The charity will not be subject to income tax when
assets from the plan are withdrawn at death, and therefore, there will be more money left over for members of
the family or other beneficiaries.
What If A Client Doesn’t Want to Leave All of His or Her IRA to Charity? Under the old proposed rules, advisors
rarely would recommend that a charity be a beneficiary of a fractional share of an IRA account for fear of
accelerating distributions from the plan after death.
The new regulations, however, make it much simpler to make a charity a beneficiary of a fractional share of
an IRA by providing a "cure" after death, during which time the charity can be paid off and separate accounts
established for the other fractional beneficiaries, thus enabling a "stretch" of the required distributions from
the plan.
Multiple IRA’s. Many clients have more than one IRA account. One good alternative is to make the charity a
beneficiary of one specific IRA and family members beneficiaries of the others. Then the client should decide,
with professional advice, whether minimum required distributions (MRD) should be taken from all accounts
pro-rata, or whether the overall MRD should be satisfied out of only one IRA, for example. This decision will
depend on the degree of charitable inclination, other assets, and family circumstances. Of course, the
provisions of the particular plan have to be reviewed to make sure that these elections are permitted and that
the sponsor is not required by the plan to make the MRD, after age 70-1/2 regardless of any decision by P to
take the MRD from other plans.
Using Trusts. A trust can be a useful device to avoid income taxes on substantial IRA’s, and to reduce or
eliminate estate taxes, if they are likely to be applicable to a client’s estate. We are still talking here about a
client with charitable intent, whether that charitable intent goes a church, hospital, parochial school, college or
university, or other non-profits.
How does this work? The primary objective is to create a Charitable Remainder Trust at P’s death with the
IRA going to the Trust, free of any income tax liability. This permits a larger amount to be invested for the
benefit of both the income beneficiaries and the charity.
The CRT can be designed with the spouse as the income beneficiary so there is no estate tax and no income
tax when assets are withdrawn from the plan. The spouse would pay income tax only on the annual
payments, or a portion thereof.
Other family members can be made income beneficiaries, of course, but the discounted value of their
interests would be includable in the taxable portion of the estate. Using this technique leverages the lifetime
exemption, based on applicable interest rates and life expectancies.
Taxable Estates. Even with increased lifetime exemptions, there are many cases where potential estate tax
liability still has to be taken into account in overall planning. Second marriages, large IRA accounts, widows,
widowers, or singles, all pose particular challenges in planning for potential estate tax, as well as dealing
with the potential income tax liabilities. Many of these individuals and their advisors need to examine the
alternatives. Plain vanilla is not always the best solution, and certainly does not often afford the income tax
and estate tax savings that good planning can afford.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| October 2002 IRA’S AND CHARITABLE GIVING by James R. Modrall III, J.D., C.P.A. |
| If you would like to receive future editions of the monthly Wealth Conservation Newsletter directly to your e-mail account, please e-mail our office using the following link: Estate Planning Newsletter |
| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |