Democratic Underground Latest Greatest Lobby Journals Search Options Help Login
Google

Do 401k and IRA accounts count towards the $3.5 million estate tax exemption?

Printer-friendly format Printer-friendly format
Printer-friendly format Email this thread to a friend
Printer-friendly format Bookmark this thread
Home » Discuss » DU Groups » Economy & Jobs » Personal Finance and Investing Group Donate to DU
 
Hokie Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Oct-24-09 03:25 PM
Original message
Do 401k and IRA accounts count towards the $3.5 million estate tax exemption?
I thought this would be a easy question but I have received conflicting opinions on this one. From my research of Publication 590 I think that these can pass to a spouse and are not subject to inheritance taxes. However, once the spouse dies and they are passed on to children or any non-spouse heir they are counted towards the total value of the estate in determining if it exceeds the $ 3.5 million exemption from estate taxes. There is an odd quirk in the law that the estate tax goes away completely next year but returns with only a $ 1 million exemption in 2011.

I expect Congress will modify this situation but that is the law as it stands right now.
Refresh | 0 Recommendations Printer Friendly | Permalink | Reply | Top
Hokie Donating Member (1000+ posts) Send PM | Profile | Ignore Tue Jan-05-10 10:18 AM
Response to Original message
1. No one has an answer?
Printer Friendly | Permalink | Reply | Top
 
A HERETIC I AM Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Jan-08-10 01:59 PM
Response to Reply #1
2. Well, Hokie....here's what I found.
It looks like the answer is "no". -- with exceptions!

Keep in mind that all tax deferred accounts, be they 401(k), an IRA or even an annuity MUST HAVE beneficiaries named at the outset. This is not the case with other assets, for example, valuable art or collectibles or savings accounts, checking accounts or regular investment accounts. There is a "Non Probate Transfer on Death" agreement that can be signed for non-qualified accounts in which beneficiaries are named, but those agreements are not required (at least in the State of Florida). That's what a trust or a will is for - to enumerate who gets what. From my experience, the IRS just wants the taxes collected on tax deferred accounts in a timely fashion, but the rules are such that they leave options to the beneficiaries and don't demand those taxes instantly. The IRS knows it is going to be able to tax that money sooner or later and since the individuals who will be paying that tax are named before the death of the account holder, there is no need to force a lump sum tax like an estate tax on qualified money. Since the methods and options for distribution are spelled out in the IRS code, nothing that I can find demands taxation at a rate any different than as ordinary income, regardless of when it is finally distributed.


From my research of Publication 590 I think that these can pass to a spouse and are not subject to inheritance taxes.
From all I have read, I agree. The taxes due on such accounts are simply ordinary income taxes. Much has to do with the age of the decedent, however. If the decedent dies before 79 1/2, the requirement to begin Required Minimum Distributions (RMD) has not kicked in. If they die after that age, then the RMD requirements must be adhered to by the beneficiary(s). From the way I understand this, it is separate from the bulk of the estate. The way I understand these things, qualified money simply does not go through the probate process because, as I mentioned above, beneficiaries are named well beforehand. There can be no argument from other family members or even other creditors. If a mom or dad wants every penny of his or her IRA to go to the black sheep of the family, there is nothing the others can do about it.

However, once the spouse dies and they are passed on to children or any non-spouse heir they are counted towards the total value of the estate in determining if it exceeds the $ 3.5 million exemption from estate taxes.
I'm not sure this is the case because there are the "generation skipping" provisions available. But I freely admit this is way above my pay grade and you would be wise to ask this of a Tax Attorney.

There is an odd quirk in the law that the estate tax goes away completely next year but returns with only a $ 1 million exemption in 2011.
There are several other things that have changed for 2010, such as the AGI cap that was in place if a person wanted to do a conversion of IRA assets to a Roth. You still have the tax liability, but last year someone with an AGI over the limit was restricted from doing such conversions. That limit (I think it was $100,000) goes away for this year only. Expect to see a LOT of large IRA balances convert to Roth accounts this year.

I can relate an experience a friend of mine had over the last 18 months.
Her mom died in December of '08, leaving a Roth of about $10,000, a traditional IRA of about $65,000, a "TOD" investment account of about $30,000 and $65,000 in savings and checking. The total was way below the limit you are talking about, but the procedure was interesting and frustrating for the kids. There were/are 6 children. With the Roth, only one of the kids - her eldest son, was named as the sole beneficiary. Her Traditional IRA named all 6 as equal beneficiaries. Her TOD account was the same. Her checking and savings accounts did NOT have a TOD set up. It took all sorts of paperwork to get the kids their share of the Traditional IRA, such as an affidavit that each signed agreeing they were all equal beneficiaries (so that no one could later claim mom meant to give them more), they all had to set up their own IRA's to receive the assets (it was almost all in mutual funds with a small sum of cash), they all had to set up their own TOD accounts to receive the assets from moms TOD (again, mostly MF's and some cash) and the eldest son had to set up his own Roth as well. The IRA finally got distributed in March, almost 4 months after she passed away. The savings and checking money went through the probate process and they finally got that distribution in OCTOBER! Some of the kids, as can be expected these days, needed the money to pay down bills. Since mom was in her early 70's, they were able to liquidate and take the cash once the IRA assets settled to their own accounts and they were not liable for the 10% penalty. That money did however get added to their AGI and was taxed as if they had gotten a raise in salary for one year only. Mom had yet to reach 79 1/2 so no one had to worry about satisfying her RMD requirements. Had she been older, it would have added yet another layer of difficulty for each kid. Regardless, each kid still had to begin taking money out within a specific period of time - 5 years. They had the choice of taking it all out at once, a little each year or all out at the fifth year. But in either case, the only tax money due was as ordinary income. If you added a zero or two to each of the account sums above, it wouldn't have changed this taxation structure, at least as far as I am aware.

The lesson learned is, plan for your own death. Make sure your ducks are in a row, otherwise your kids are going to have to spend a BUTT-LOAD of time sorting everything out.

I'm sorry I don't have a better answer for you but as I said, much of the minutia of those tax laws are way above my pay grade!
Printer Friendly | Permalink | Reply | Top
 
Hokie Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jan-10-10 02:28 PM
Response to Reply #2
3. Wow, thanks for the reply
I read Publication 590 the same way that you do. The IRA's may go directly to a spouse beneficiary the do not count towards the limit but when they then are transferred to other heirs they are counted. The reason I asked is that we are in the process of updating our wills and I was trying to decide whether to do simple wills or the Trust A/B wills. I am sure Congress is going to act to fix the estate tax loophole for 2010 but who knows what exactly will be the final outcome. I don't understand the generation skipping provision either and I will have to research that.

I was aware of the changes on IRA conversions for 2010 and I am probably going to take advantage of that. There is also a provision that lets you spread taxes due for converting over the next two years. This could be especially important if you are retiring and might be in a lower tax bracket in 2011 or 2012. This is available only for conversions in 2010. There is also a provision that lets you "undo" the conversion up to a certain point in time and treat it as if it never happened.

Another thing that would be a no brainer would be to covert any after tax money if you have an old 401K from a former employer to a Roth IRA since there would be no tax to pay now and the money would earn tax free income in the Roth IRA.

This link covers some of the changes. http://www.goodfinancialcents.com/2010-roth-ira-convers... /
Printer Friendly | Permalink | Reply | Top
 
DU AdBot (1000+ posts) Click to send private message to this author Click to view 
this author's profile Click to add 
this author to your buddy list Click to add 
this author to your Ignore list Fri Jul 11th 2014, 06:30 AM
Response to Original message
Advertisements [?]
 Top

Home » Discuss » DU Groups » Economy & Jobs » Personal Finance and Investing Group Donate to DU

Powered by DCForum+ Version 1.1 Copyright 1997-2002 DCScripts.com
Software has been extensively modified by the DU administrators


Important Notices: By participating on this discussion board, visitors agree to abide by the rules outlined on our Rules page. Messages posted on the Democratic Underground Discussion Forums are the opinions of the individuals who post them, and do not necessarily represent the opinions of Democratic Underground, LLC.

Home  |  Discussion Forums  |  Journals |  Store  |  Donate

About DU  |  Contact Us  |  Privacy Policy

Got a message for Democratic Underground? Click here to send us a message.

© 2001 - 2011 Democratic Underground, LLC