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• W23609008 startingPage "85" @default.
• W23609008 abstract "Alternative beneficiaries including charitable trusts should be considered. In income and estate tax planning, sometimes insufficient consideration is given to naming a beneficiary for the capital that has accumulated in qualified retirement plans and individual retirement accounts. In many instances, wealthy clients accumulate substantial sums sometimes millions of dollars--in such plans. While qualified plans and IRAs are preferred vehicles to defer taxes while the owner is alive, without proper planning they are an inefficient way to pass wealth at death. The combined income, estate and in some instances excess accumulation excise taxes that typically apply to qualified plan and IRA accumulations distributed at death are staggering. Because of the potential heavy tax burden, CPAs should consider advising some taxpayers to name alternative beneficiaries, such as a spouse, a charity or a charitable remainder trust. This article reviews the benefits of naming other beneficiaries--often to the benefit of both the taxpayer and the beneficiary. ALTERNATIVE BENEFICIARIES The scope of the tax problem--and the planning opportunities--presented by' substantial retirement plan accumulations can best be demonstrated by an example: Dr. Smith is a wealthy physician who has assets that put her in the highest marginal estate tax bracket; $1 million of them are in an IRA. She is happily married and has adequately provided for her husband under her will. Wishing to similarly provide for her children, Dr. Smith names them as equal beneficiaries of her IRA, thinking each will receive a substantial sum. Dr. Smith also is philanthropically inclined and is willing to make a meaningful charitable bequest if she is convinced the aftertax cost is low and that a donation will not otherwise disturb her estate plan. If Dr. Smith makes no changes in her IRA beneficiary designation and leaves it to her children, the IRA will be subject to income, estate and possibly excess accumulation taxes. The total tax potentially associated with a $1 million IRA is approximately $770,000. Indeed, under certain circumstances, such as if Dr. Smith's children live in a state that has its own income tax or if Dr. Smith lives in a state, like New York, that has an estate tax greater than the maximum federal credit for state estate taxes, the tax burden could be even greater. SPOUSAL DESIGNATION Not surprisingly, designating a spouse as beneficiary can save on taxes. If the spouse has the right to withdraw the entire sum, the IRA qualifies for the estate tax marital deduction. Consequently, no estate tax is payable until the spouse's death. Similarly, if the owner had no other qualified plan or IRA benefits payable to a beneficiary other than the spouse, the excess accumulation excise tax could be delayed until the spouse's death under Internal Revenue Code section 4980A(d)(5). Whether children or a spouse are designated as beneficiary, income taxes are delayed until money is withdrawn from the IRA. However, under the IRC rollover and minimum distribution rules, the timing of distributions can be delayed significantly if a spouse is the designated beneficiary. For example, if a spouse is the beneficiary when the IRA owner dies, he or she can roll over the IRA balance to his or her own IRA, delay distributions until age 70 1/2 and then receive distributions over his or her lifetime and the lifetime of another beneficiary. A retirement plan owner who considers his or her spouse a spendthrift may still want to transfer the plan to the spouse, but not outright. The owner might make the plan payable to the spouse as an annuity, or in installments. The owner should, however, be alert to an estate tax issue: Under the terminable interest rule, installments payable to a spouse (with no right to accelerate payments) do not ordinarily qualify for the marital deduction. To deal with this problem, owners can name as beneficiary a trust that qualifies for the marital deduction. …" @default.
• W23609008 created "2016-06-24" @default.
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• W23609008 date "1996-05-01" @default.
• W23609008 modified "2023-09-23" @default.
• W23609008 title "Naming IRA Beneficiaries That Cut Taxes" @default.
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