A Method To Help Families Minimize Taxes on IRAs

hey there i'm estate planning attorney paul rabale and in this video i am going to explain what you may not realize about ira beneficiary designations and inherited iras that could cause your family to send send significantly more money to the irs than they really need to so what i've learned from 30 years of estate planning is that every family is unique and each family each couple and each individual needs to make their own decisions that are in their best interest and in the best interest of their loved ones and hopefully this video will enable you to make better informed decisions so that you can keep and protect more of what you have for yourself and your family while sending less to the almighty federal government after all our own united states supreme court stated in the 1935 case of gregory versus helvering they stated that the right of a taxpayer to decrease the amount of what otherwise would be his taxes or altogether avoid them by means which the law permits cannot be doubted and to quote judge learn at hand he said we may arrange our affairs so that our taxes shall be as low as possible we are not bound to choose that pattern which best pays the treasury we do not even have a patriotic duty duty to raise our taxes so this video has to do with how much income tax families will pay on an ira owner's traditional ira we're not talking about the non-taxable roth iras we are discussing those not yet taxed traditional iras many people have large iras because they accumulate significant amounts in their company 401k and then retire and roll their 401k account balance over into a traditional ira in fact there are many people out there who while they were working they were frugal they maxed out their contributions to their 401k summer all of those contributions were matched by their employer and they retired with a healthy six-figure ira seven-figure ira which means a million dollars or more and in some cases eight-figure ira so here's what's going to happen to almost all of those families of those ira ira owners let's say bob has a traditional ira worth two million dollars bob has a wife christine christine has her own six hundred thousand dollar ira and together they have four adult children let's say bob dies when he is 68 years old when christine is 64. what's going to happen for reasons i'll explain later is after bob dies christine gets bob's death certificate runs to bob's financial institution and does an income tax free transfer from bob's ira into christine's ira but christine doesn't need the two million dollars she lives comfortably off of a pension social security and other investment income so christine's 2.6 million dollar ira she had she when bob dyed she had her own 600 000 ira and she inherited bob's 2 million ira christine's 2.6 million dollar ira sits there invested and then when christine dies let's say 15 years later when she is 79 and assuming christine's 2.6 million dollar ira when bob dies is invested at a 5 rate of return 15 years later when christine dies the ira is worth pre-tax 5 million and five a thousand two hundred and thirteen dollars at this point bob and christine's four children are the beneficiaries and they each move their portion each of their portion is one million three hundred and fifty one thousand three hundred three 303 into their own and inherited ira so what do the children do well they want to defer tax as long as possible so under the secure act they each sit on their inherited ira that starts with one million three hundred and fifty one thousand three hundred and three dollars and they invest that at a five percent rate of return so that ten years after christine dies when they are required to take a total income taxable distribution of their inherited ira again pursuant to the secure act their required minimum distribution is the total balance of the inherited ira each of them gets a taxable distribution of two million two hundred and one thousand one hundred thirty dollars which assuming tax rates don't change a bit this distribution or the bulk of it will be taxed at thirty nine point six percent the top federal income tax rate in 2026 and beyond so each child will pay 871 thousand six hundred and forty seven dollars of federal income tax or the family pays a total of three million four hundred and eighty six thousand five hundred and ninety dollars of income tax to the federal government just from bob and christine's iras now let's look at a different scenario same initial facts bob dies with a two million dollar ira when he is 68 and his wife christine who has her own six hundred thousand dollar ira and who was 64 when bob died lives another 15 years but after bob dies and after researching her situation and perhaps discussing it with someone who understands the rule christine says wait a second here i don't need another two million dollars in my estate to live off of and in addition christine says i'd like to see our four responsible adult kids get some kind of a financial benefit as a result of their father passing away and i'd like to see them not have to struggle so hard they have to send their kids to college etc and it sure looks like our family can pay a whole lot less tax if i disclaim a portion of bob's ira let it go on down to our four children so christine decides to disclaim eighty percent of bob's two million dollar ira and she moves twenty percent or four hundred thousand dollars into her ira so all of the disclaimer rules are followed which result in each of their four children having an inherited ira account with four hundred thousand dollars and under christine's well thought out plan she encourages the four children to instead of taking one big rmd distribution 10 years after bob dies which most people would do because the secure act requires non-spouse beneficiaries to take all of the inherited ira out within 10 years after the ira owner dies christine encourages them to take roughly 10 equal annual distributions over each of the 10 years after bob dies and because these taxable distributions are spread out over 10 years the kids are never taking a distribution that would lump them into the 39.6 percent federal income tax bracket in fact these 40 000 plus annual distributions to each child would likely be taxed at 22 which for the year 2022 is the tax rate for married couples filing joint returns who have up to 178 150 of taxable income or it might be taxed at 24 which is the income tax rate for married couples filing joint returns who have up to 340 100 of taxable income but those taxable distributions will never be taxed at the highest 39.6 percent rate because you were spreading those taxable distributions out over many years so the result of christine disclaiming 80 percent of bob's two million dollar ira is that after bob dies the four kids get distributions of forty thousand dollars plus each year for ten years and pay income tax at perhaps 22 or 24 and then 15 years after bob dies which is five years after the kids get their last distribution from the inherited ira that they inherited from bob christine dies 15 years after bob with her ira that grew from 1 million dollars remember when bob died she had her own 600 thousand dollar ira and she accepted 20 percent of bob's two million dollar ira her one million dollar ira grew from a million dollars over the 15 years that she survived bob it grew to 2 million 78 928 so again each child gets another inherited ira after christine dies with each child's account balance of five hundred and nineteen thousand seven hundred and thirty two dollars and again each child elects even though they are not required to because the securex says they can leave it alone for 10 years after they inherit the ira and take one big income taxable distribution each child elects to take roughly 10 equal annual distributions of 50 000 plus each year that get taxed again at say the 22 or 24 federal income tax rate depending on their income tax rate so let's summarize the two strategies under the first and somewhat common let's defer taxes as long as possible strategy bob dies with a two million dollar ira christine moves it all into her ira and at the time at the time bob died she had a 600 000 ira of her own christine dies 15 years later and the kids split christine's large ira into their inherited ira accounts where they defer taxes for another 10 years and then when the kids can no longer defer income taxes and they are finally forced to take a required distribution and get a benefit from what their parents had worked for the kids are now in their late 50s and 60s their highest income earning years and because they receive their entire entire inherited ira balance in one calendar year they each must pay federal income tax at the highest 39.6 federal income tax rate under this second strategy after bob dies with a two million dollar ira christine realizes that she doesn't need another two million dollars in her estate to live off of she wants to see her four responsible adult children who are in their 30s and 40s when bob dies not to have to struggle so much and she likes the idea of the ira being taxed at 22 or 24 instead of 40 or more so she disclaims 1.6 million dollars of bob's two million dollar ira and allows each of their four children to immediately have four hundred thousand dollars into each child's inherited ira under the secure act since the kids are not the surviving spouse of bob the kids must take the money out of the inherited ira and pay income tax within 10 years after bob dies but instead of waiting for one lump sum 10 years later christine encourages them to take equal distributions from their inherited ira each year over the next 10 years allowing those distributions to be taxed at 22 to 24 rather than 40 percent the result is that the taxes are about cut in half christine has more than she needs to live out her life the kids all follow christine's instruction to take distributions over 10 years and christine gets to enjoy seeing her kids not struggle so much as christine's children try to financially survive this world putting their children through college as well as handling all of life's financial difficulties that are thrown at them now if you have an ira and you want your spouse and children to have the opportunity to take advantage of paying income tax at lower rates instead of postponing all ira distributions until until 10 years after the surviving spouse dies you have generally three options first you can name your spouse as your 100 primary beneficiary and your children as your contingent beneficiaries by using this option you will be relying on the fact that your spouse will be able to make an informed and educated decision whether to disclaim part or all of your ira after your death note that to execute a qualified disclaimer of all or a portion of an ira it must be completed within nine months after the death of the ira owner it must be done before the primary beneficiary has access to user enjoyment of of the funds and the disclaimer causes the ira to pass directly to the secondary or contingent beneficiaries without the primary beneficiary receiving it and directing where it goes in other words if christine one month after bob dies with his two million dollar ira transfers bob's ira into christine's ira she loses the opportunity to disclaim bob's ira even though there is eight months left before the nine month disclaimer deadline expires so if you name your spouse as your primary beneficiary of your entire ira you are giving your spouse the maximum flexibility to either accept all or part of your ira but you are relying on your spouse to proactively make a timely informed and conscious decision to disclaim all or a portion of your ira even though no one may be advising your spouse to do so but this option gives christine the most flexibility and that after bob dies christine can look at the income tax laws and the family dynamics and make a decision then to disclaim this claim none some or all of bob's ira second you could name your children primary beneficiaries perhaps along with your spouse in our bob example where he had a two million dollar ira bob could have named christine and each of the four children as primary beneficiaries they each could have been a 20 primary beneficiary this after bob's death would have automatically caused the four children to establish their inherited ira after bob dies enabling them to receive distributions over 10 years to minimize the income tax impact on each of those distributions and third bob could name five different primary beneficiaries but instead of naming each of the children as 20 primary beneficiaries he could name a conduit trust for each of them as primary beneficiaries those conduit trusts would require that the trustee pay those distributions over a 10-year period this could be helpful if you think your children need that additional requirement which prevents them from taking a large income taxable distribution in one year now allow me to be a bit of a skeptic here and tell you why this won't happen much in the future and it's because no one is going to advise your spouse to disclaim part or all of your ira after you pass away your financial advisor may not advise your spouse to disclaim part or all of your ira because your financial advisor is compensated based on their assets under management and your financial advisor wants your spouse to accumulate as much pre-tax value in their ira as possible perhaps without regard to future income tax consequences to the family they don't want to see the surviving spouse disclaim have the money go to the kids inherited iras only be to be transferred to the account that the financial advisor of the kids manages your cpa or accountant will not advise your spouse to disclaim because your spouse unknowingly will immediately put your ira into your spouse's name after you die losing the opportunity to disclaim all that will likely be done before your surviving spouse even talks to your cpa or accountant in addition your cpa or accountant may not even think about this as an option to benefit the family and your estate attorney may not bring this up because many estate attorneys only concern themselves with the probate estate your ira passes to beneficiaries outside of probate in addition many estate settlement attorneys will tell you to talk to your cpa or accountant about any income tax reporting requirements so what's going to happen unless you pay close attention to this video is you will not take distributions from your ira other than the small required minimum distributions that you must take starting at age 72 when you die your spouse will transfer your ira to your spouse's ira and not take any distributions other than the small required minimum distributions your spouse must take starting at age 72 and then when your spouse dies your children will inherit these amounts in inherited iras where they will not take any distributions until 10 years after the death of the surviving spouse when they are forced to take it all out in one big lump sum and pay tax at 40 to 50 percent perhaps at a minimum you should tell your spouse and kids something like hey guys i named my spouse as my primary beneficiary and my kids as my contingent beneficiaries after i die my spouse should not rush to immediately put my entire ira into my spouse's ira before you touch my ira after i die take a look at the opportunities that may present themselves to minimize the income tax effect and to allow our children to benefit by the surviving spouse disclaiming some or all of my ira and then allowing the children to take distributions from my ira over the 10-year period after my death at lower income tax rates and then doing the same thing when the children inherit any iras from my spouse so here's what i suggest you do if you know someone with a large ira simply share this video with them there is a share arrow next to the like button it enables you to email this link to anyone you want or to share this video with your acquaintances on other social media platforms they will likely thank you for it thanks for watching and have a great day

Channel: America's Estate Planning Lawyers

Views: 126,903

Keywords: Disclaimer, Qualified Disclaimer, Deadline for disclaimer, Taxes on IRA, Traditional IRA taxes, How to disclaim an IRA, How to disclaim, When to discalim, Pros and Cons of Disclaimer, Conduit Trust, Conduit trust as IRA beneficiary, Accumulation trust versus conduit trust

Id: mPOa-x1pYTs

Length: 18min 54sec (1134 seconds)

Published: Mon Dec 13 2021