Estate Planning Curve Balls

Monday 4/12/2004


Can Estate Planning or estate settlement affect your Income Taxes?

The trillion dollar error.  That’s how much additional income tax the IRS stands to collect because IRA beneficiaries are unaware of the offset for estate taxes paid at the time of inheritance.

Many people thought estate planning died when the tax law changed in 2001.  Everyone kind of knows that the tax really isn’t going away, but it seems so much easier to procrastinate.

Knowledge of the estate laws and how they interface with income tax law is a big consideration for non-spouse beneficiaries of IRAs.

When you inherited your Mom’s IRA it was worth a million dollars.  Every year you get a distribution from the IRA that is taxable – or is it?  You get a 1099R for the full amount from the company that invests your IRA.  So don’t you just add that onto your taxable income?  Maybe not.

Do you have a copy of the 706 form that was filed on your Mom’s estate after she died?  If you don’t – get one.  If you do, get it out and take a look to see if any estate tax was paid on the IRA money.  It would have been paid out of other estate assets so as not to trigger an income tax liability in the estate. 

If the estate paid estate tax on the IRA, then that tax can be used to offset your income tax as you receive the money from the IRA account.  The investment company does not track this.  You have to – unless, of course, you are using the same accountant that helped settle the estate – then he or she should be doing this – just double check.

I’ll detail an example tomorrow – but be aware that as much as half of the amount received each year could be tax free.

It is estimated that right now there are about 11 trillion in IRA assets that fall into this category. 


Tuesday 4/13/2004


It is estimated that right now there are about 11 trillion in IRA assets that have already been partially taxed.  If you don’t know about this you could be paying taxes twice.


Did you receive an IRA from your Aunt Tillie – or your mom or dad?  Are you taking the minimum distributions each year?  Are you paying tax on 100% of that distribution?  If Aunt Tillie’s estate paid estate taxes, you may find a little digging will allow you to take some of that IRA distribution tax free.

When someone dies and their estate is big enough, estate taxes have to be paid on everything they owned at death.  That includes IRAs.   In the past, the amount of money someone could pass along without estate tax was as low as $250,000 and more recently, $600,000.  Maybe you have no idea how much Aunt Tillie had when she died – and you felt it would be impolite to ask.  Well, it’s time to go back to the executor or the attorney who handled the estate and find out whether Aunt Tillie’s estate paid estate taxes on the IRA money you received.

If they did, you can get a tax deduction for it when you go to pay your income taxes on the amount of the distribution. 

Say your part of Aunt Tilie’s IRA was $200,000.  Aunt Tille’s estate paid estate taxes of $74,000 on that portion.  That means a little more than a third of the amount you received is income tax free because of the credit you get for the estate taxes paid.  Depending on your tax bracket, that could save you as much as $25,000 in income tax.

Don’t be surprised if you didn’t know this – and your accountant probably did not either.  Your accountant has no knowledge of your Aunt Tillie and where that IRA came from.  All they see is the 1099R.  The IRS doesn’t even have a single place to go to get this information.  Your financial planner should be able to talk knowledgeably about this – but ultimately, it’s your tax and your responsibility to get the puzzle pieces together.


Wednesday 4/14/2004


What you don’t know can hurt you.


What happens when you don’t know what you don’t know?


Generally, you pay out more of your hard earned dollars than necessary.  Why?  Because you don’t study taxes and law and finance – or you don’t apply it to yourself – or you don’t find a good advisor and hire their knowledge.

Here’s an item you may need to understand - New York State has decoupled from the Federal Estate tax system.

What does that mean to you?  Perhaps an overhaul of your estate plan?  Certainly some understanding of the new tax rules.

In the past, NYS tied their estate tax collection into the Federal rates.  The Fed gave a credit for state estate taxes paid – so NY would charge an amount equal to the credit.  Net effect was you paid the same amount of tax as you would to the Fed – it was just split between the Fed and the state.  Right now NY has decoupled – they’ve separated their death tax collection from the Federal process.  If you die this year with a large estate you would see a Federal tax rate of 48% and a state tax rate of 12% - a total of 60%.  Even when – or if – the Federal estate tax disappears, there will still be NYS tax to pay.  




Thursday 4/15/2004

I love being self employed.  It creates some wonderful tax deductions.  But owning a business at death can cost your heirs big bucks in NY.


In the past, when NYS tied their estate tax collection into the Federal rates, the Fed gave a credit for state estate taxes paid – so NY would charge an amount equal to the credit.  Net amount of tax paid was the same – it was just split between the Fed and the state.  With NY now decoupled – they’ve separated their death tax collection from the Federal process - and a state tax rate of 12% You could be paying hundreds of thousands of dollars to NY if you die.

If the estate includes a business, you’ve also lost the business tax deduction that disappeared last December.  The reason I mention this is that the value of your business may be hotly contested by the Fed or the state because they can collect much more money.  If you have a business that pays out a half million dollars in profits to the owners you may have placed a value on the business of a half million or even a million dollars – this is a favorite way to try to cut down on estate taxes.  Maybe your buy-sell agreement even states a value.  This is another place where what you don’t know could really hurt you.  What would a buyer be willing to pay for a business that generates a half million a year of profit?  If you use the simple capitalization method and divide the profit by an interest rate that someone might pay to purchase the business – say 8% - the business is worth 6 million dollars. 

If your buy-sell agreement – the one that says your partners will buy you out at death, disability or retirement – for a stated price – if that agreement does not meet IRS standards there may be a pitched battle going on between your heirs and the IRS (resulting in huge legal fees and probably thousands or millions more taxes than you planned on).  If you figure your business is worth a half million and the IRS or NYS decide it’s worth 6 million – do you know what the estate tax liability jump is!?  If not, better find out.






Friday 4/16/2004

With the decoupling of NYS’s estate tax system from the Federal estate tax system, IRAs are creeping up to a massive tax level.  Right now, if you died with a large estate, your IRA could be subject to a 60% estate tax between the state and federal rates.  And then, also to income tax!


Doctors, lawyers, professors, high level executives – these are some occupations where the majority of assets in the estate can be found in pension plans.  I know there are many older, retired professionals who have assets of 5 million or more in their IRAs – and that’s on top of a couple of homes and some other assets bringing their totals to well over 6 or 7 million. 

Without some good estate planning and tax planning, 80% of those assets will end up in the hands of the IRS.  60% to estate tax and 40% or more to income tax – that 5 million dollar IRA is looking more like a 1 million dollar IRA after all the taxes are paid. 

The 2001 tax law allows for a “stretch” where your beneficiaries can take the IRA distributions over their lifetime.  Unfortunately, without proper estate planning the IRA money will have to be used to pay the estate tax – forcing it out of the tax shelter of the stretch and giving Uncle Sam a big payday – at your expense.

Does that seem fair – IRS gets 4 million and your heirs get 1 million? 

If that’s not the result you want – you’d better get to work on your capital transformation strategy.  There are at least 6 things you can do to disinherit the IRS or drastically reduce the tax or find cheap dollars to pay the tax for you. 






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Monday 06/21/2004 Selling Your Business

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Monday 05/31/2004 IRA – Your Biggest Asset - Or Your Biggest Tax Bill?

Monday 05/24/2004 Retirement Blueprints – What’s Your Game Plan?

Monday 05/17/2004 Planning for Death

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Monday 05/03/2004 Taking on The Risk of Loss

Monday 04/26/2004 Is a House a Good Investment?

Monday 04/19/2004 Attorney Selection, Personal Education and Divorce Agreements

Monday 04/12/2004 Estate Planning Curve Balls

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Monday 03/01/2004 Statistics

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