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How to Create the Perfect IRA Estate Plan
IRA owners want three tax breaks: 1) the $2,000,000 estate tax exemption ($3,000,000 in 2009); 2) the stretch IRA; and 3) control over the funds. Generally, an IRA can get only two of these three. Examples:
1) Leaving an IRA to a credit shelter trust for the benefit of the surviving spouse uses the estate tax exemption, avoids the estate of surviving spouse, basically gives the surviving spouse limited control over the trust because the trust passes to the remainderman after the spouse’s death, but the stretch is preserved.
2) Leaving the IRA directly to the spouse preserves the stretch over her life expectancy and control over the funds but the IRA will be taxed in her estate because the surviving spouse is the owner.
3) Leaving the IRA directly to the children up to the estate tax exemption uses the estate tax exemption and preserves the stretch IRA over the life expectancy of the children, but control over the funds is given up and left to minors or adult children possibly not ready to handle the funds.
How to get all three tax breaks? Buy life insurance up to the present or projected future value of the IRA. The RMDs can be used to pay the premiums. Upon the IRA owner’s’ death, the life insurance proceeds will be used to pay the estate taxes on the IRA and the net proceeds left will pass to the beneficiaries who will use them to pay income taxes on the IRA RMDs.
The key to this strategy is that life insurance proceeds are income-tax free whereas distributions from IRAs are subject to income tax. Both are subject to estate tax, but under current estate tax law, an irrevocable life insurance trust can be setup first to purchase the insurance policy. The proceeds will escape estate tax if the trust is properly drafted and the insurance policy is purchased after the trust is setup.
The common situation of many families is having an IRA as the only major asset outside of the house(s). As such, the estate is illiquid because there are no liquid assets (cash, money markets, securities, etc.) to pay the estate and income taxes on the IRA and house(s).
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© John A. Epeneter.CPA/PFS, CFP®, CFS, CCPS, CRPC®. All rights reserved.
1 Marginal Way, Springvale, ME 04083 info@johnecpa.com Voice: 207-459-7803 FAX: 207-459-7804 CFP® and CERTIFIED FINANCIAL PLANNER™ are certification marks owned by the Certified Financial Planner Board of Standards, Inc. These marks are awarded to individuals who successfully complete the CFP®, Board's initial and ongoing certification requirements. CARE Asset Management and Strategies, Inc. is a Registered Investment Advisor in the state of Massachusetts and a Licensed Investment Adviser in the state of Maine. |
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