| Jumbo IRAs, large 401Ks, and other qualified pension | | | | before his or her death. An example would be a |
| money are subject to a double tax up to 80% if the | | | | paycheck for wages not paid until after death. The |
| owner of the large IRA dies with an estate tax | | | | paycheck would be included in his estate for estate |
| problem. | | | | tax purposes and is taxed to whoever received the |
| IRD: "Income in Respect of a Decedent" Internal | | | | check. |
| Revenue Code Sec. 691(c) refers to those amounts to | | | | IRAs, 401Ks, and other qualified retirement plans are |
| which a decedent was entitled to receive as gross | | | | considered to be IRD property when received by a |
| income, but which were not properly includable in | | | | beneficiary. Other IRD assets are: Unpaid bonuses, |
| computing the decedent's taxable income for the | | | | unpaid interest, dividends, fees, commissions, installment |
| taxable year ending with the date of the decedent's | | | | notes, rents, sale proceeds on sales before death. |
| death or for a previous taxable year under the | | | | Tax Planning IRA |
| method of accounting employed by the decedent. | | | | Tax planning for large IRAs, Jumbo IRAs, 401Ks, and |
| Rev. Rul. 92-47 holds that a distribution to the | | | | other qualified large pension assets can pose a |
| beneficiary of a decedent's IRA is IRD ("Income in | | | | number of complex problems, resulting mostly from the |
| Respect of a Decedent") under Sec. 691. The amount | | | | interplay of several distinct set of tax rules. On the |
| of the IRA distribution is included in the gross income of | | | | death of the IRA owner, the IRA and other qualified |
| the beneficiary for the tax year when it is received. | | | | plans, face a potential double tax hit. First, the fair cash |
| However, Sec. 642(c)(2) provides that an estate or a | | | | value of the asset is includable in the taxable estate |
| trust shall be allowed a deduction for any amount that | | | | for estate tax purposes up to 55% plus applicable |
| is permanently set aside for charitable purposes. | | | | state taxes on the same amount (State estate taxes |
| Reg. 1.691(a)-1(b). IRD assets are those in which there | | | | and federal estate taxes are two separate taxes). |
| is either untaxed ordinary income or a deferral of | | | | Second, payments from the IRA to other beneficiaries |
| capital gain. When the beneficiary receives the asset, | | | | are subject to the income tax, based on the theory |
| the beneficiary is subject to taxation on the asset, just | | | | that no income taxes were paid during the life of the |
| as the original owner would have been subject to such | | | | original IRA owner. |
| taxation if he or she had recognized the income or | | | | Further complicating large IRA planning is made more |
| gain. | | | | difficult by the some time complex rules on mandatory |
| A decedent's gross estate includes the value at the | | | | "Required Minimum Distributions" (RMDs) applicable to |
| time of decedent's death of "all property, real or | | | | IRAs imposing a 50% penalty tax on amounts that |
| personal, tangible or intangible, wherever situated." See | | | | should have been distributed. |
| IRS Code Sec. 2031(a). A decedent's estate may | | | | Required Minimum Distributions (RMDs) generally are |
| include stocks and securities, real estate, business | | | | minimum amounts that the IRA owner must withdraw |
| interests, personal effects, annuities, trusts, 401Ks, IRAs, | | | | annually, starting with the year that he or she reaches |
| and other qualified plans. Each of these items is | | | | 70 1/2 years of age or, if later, the year in which he or |
| subject to a valuation determination as set forth in IRS | | | | she retires. |
| Reg.20.2031-1. | | | | IRA Rescue Planning |
| When IRA is Subject to Double Taxation | | | | IRA rescue planning is a term used to take positive |
| If you are over the age of 60+ and you have assets | | | | action to eliminate the estate tax and to mitigate the |
| subject to an estate tax, your IRA is guaranteed to be | | | | income tax consequences of a double tax on large |
| subject to a double taxation (75% or more) under IRS | | | | IRAs, 401Ks, and other qualified pension plans. Because |
| Code Sec. 961(c). | | | | of the devastating tax consequences, the first |
| Example: If you have a $5million estate and a $1million | | | | objective is to create a scenario to pass more wealth |
| IRA (Jumbo IRA / Large IRA), because of IRD "Income | | | | to heirs. |
| in Respect of a Decedent" your heirs will only get | | | | Stretch IRA Beneficiary - Avoiding Income Taxes on |
| $250,000. The government has written itself in for a | | | | IRA |
| guaranteed $750,000 because you voluntarily did not | | | | One solution that works, if you do NOT have an |
| mitigate this double-tax penalty. | | | | estate tax problem, is the Stretch IRA. As the name |
| Large IRA (Jumbo IRA) = $1,000,000 | | | | implies "stretch" the designated beneficiary is someone |
| Estate Tax*: ($500,000) | | | | other than the owner, such as your child or grandchild. |
| Income Taxes (state** and federal*): ($250,000) | | | | Distributions are "stretched" over the life expectancy |
| Total Taxes on Large IRA*: ($750,000) 75% | | | | of the child (instead of the IRA owner). Essentially this |
| Total IRA distributed to your loved ones, the | | | | is to avoid the "lump-sum" payment of income taxes |
| beneficiaries: $250,000 25% | | | | on the IRA, by stretching distributions over the life of |
| * For illustration purposes only. Japan has a higher rate | | | | the child or grandchild. |
| of 70%, Germany takes a maximum of 40%, while | | | | As stated, IRA rescue is much more important if you |
| Australia and Canada, take nothing. | | | | have an estate tax problem. Stretch IRAs do NOT |
| ** Taxes on inherited wealth are a traditional and | | | | work for those that have an estate tax problem. If you |
| common revenue source for states. Some 16 states | | | | pass an IRA to a child/beneficiary through a Stretch |
| collect approximately $4.5 billion per year from these | | | | IRA, your estate will have to deal with the 55% estate |
| taxes. Illinois, Maine, Maryland, Massachusetts, | | | | tax, which is due when passing that asset to their heirs. |
| Minnesota, New Jersey, New York, North Carolina, | | | | Where is the child going to get funds to pay the 55% |
| Oregon, Rhode Island, Vermont, the District of | | | | tax? Why the IRA of course. The problem is that the |
| Columbia, Connecticut, Kansas, Oklahoma, and | | | | beneficiary will have to pay income taxes upon taking |
| Washington. The estate tax in Wisconsin expired | | | | the money out of the IRA to pay the estate taxes; |
| effective July 2007 and in Kansas and Oklahoma will | | | | and if the beneficiary is under the age of 59 1/2, a 10% |
| expire effective 2010. | | | | penalty will be levied upon the withdrawal from the |
| Simply stated, IRD is income a decedent earned and | | | | IRA. It's a vicious cycle. |
| was entitled to receive but never actually received | | | | |