Plan Estate So Heirs Aren’t Doomed by Taxes

Plan Estate So Heirs Aren’t Doomed by Taxes

The News Journal
by Nancy F. Blumberg, CPA, CFP
Simon Master Sidlow, P.A.

If you are a high-income earner, you may have accumulated a significant sum over the years.

Often your retirement plan represents the largest asset of your net worth. Many people also have accumulated substantial assets in individual retirement accounts. Planning for the distribution of those accounts during your lifetime, as well as at your death, provides both challenges and opportunities.

Pension plan assets are subject to several taxes after your death.First, those assets are included in your gross estate and are subject to Federal estate tax and state estate and/or inheritance taxes, if applicable.In addition, there is a 15 percent excise tax on the excess over $750,000(adjusted annually for inflation).

Then, even though these assets are included in the estate, they are subject to income tax accrued during your life but receivable after your death.Therefore, when your beneficiaries finally receive the after-tax funds, only 15 percent of the value may remain.

But if you choose a charity as a beneficiary of your retirement funds, they will pass tax-free to the charity.

For example, if you have $1 million in an IRA and are in the highest estate tax bracket (over $3 million in assets) you will pay $550,000 in estate tax.If the beneficiaries are in the highest income tax bracket, too, they will pay approximately $450,000 in federal and Delaware income tax.

They will, however, get $550,000 in deductions for the income because of so-called respect to the decedent laws.That reduces the income tax from $460,000 to $207,000.But they must add the 15 percent estate excise tax on $250,000 or $37,500 and the total taxes will be $794,500.

Therefore, the heirs may get a little over $200,000 from the $1 million IRA assets.

But by choosing a charitable beneficiary for your pension plan, the organization will have the use of the entire $1 million. The gift will reduce the estate and be received income tax-free by the charity.

The laws relating to qualified retirement plans are complex. Careful planning for these assets can enhance the benefits available to your heirs.