Problemática derivada del análisis

EXAMPLE: Assume Mother's total taxable estate is $6,000,000 and that all of it will be transferred to her sole heir: Daughter. Assume that the estate will pay the entire estate tax

regardless of how Daughter acquired the assets (e.g., joint tenancy, etc.). If $100,000 in an IRA is immediately distributed to Daughter and if Daughter is in a 39.6% marginal income tax bracket, then the combined estate and income taxes on the $100,000 of IRA assets would be $63,760 (63.76%).

Beginning Balance in Retirement Plan $ 100,000

Minus: Total Estate Tax Paid by the Probate Estate (40,000)

Minus: Income Tax On Distribution

Gross Taxable Income $ 100,000

Reduced By §691(c) Deduction for Federal Estate Tax

Total Estate Tax $ 40,000 State Tax Credit* Zero

Deduction for Federal Estate Tax ** (40,000)

Net Taxable Income *** $ 60,000

Times Income Tax Rate**** x 39.6%

Net Income Tax on Income In Respect Of Decedent (23,760)

NET AFTER-TAX AMOUNT TO DAUGHTER $ 36,240

444444444

* Treas. Reg. Section 1.691(c)-1(a) limits the deduction to federal estate tax. The 2001 Tax Act

provided that the Section 2011 state tax credit was fully repealed by the year 2007 so there is no state tax adjustment.

** The deduction is an itemized deduction on Schedule A that is claimed on the last line of the form ("other miscellaneous deductions"). It is not subject to the 2%-of-adjusted-gross-income ("AGI") limitation that most miscellaneous deductions are subject to. Sec. 67(b)(7).

*** The net taxable income from the IRD will actually be greater than this amount The IRD will increase the recipient's AGI by $100,000 which will decrease the recipient's itemized deductions by 3%, which would be $3,000 in this example. Sec. 68. The 3% reduction was omitted from this calculation in order to simplify the computation.

**** Whereas retirement income is exempt from the 3.8% health care surtax, if the source of IRD is income that is subject to the surtax (interest, annuity, rents, etc) then the effective marginal income tax rate would be even higher than 39.6%. The 3.8% health care surtax applies when an individual’s adjusted gross income exceeds $250,000 ($300,000 on a joint return). For a trust or estate, the 39.6% marginal tax rate (plus the 3.8% health care surtax) applies with taxable income over just $12,000.

C. For Estates Near the $5 Million Threshold, Consider a Pre-Mortem Roth IRA Conversion to Eliminate the Estate Tax

1. By paying the applicable income tax in the year that contributions are made to a Roth account, a person will have a smaller estate that could be subject to estate tax. By comparison, a person with a taxable estate will be paying estate tax on the deferred income taxes in a traditional retirement account.

2. A Roth IRA conversion as a pre-mortem estate tax planning strategy:

EXAMPLE: Assume that Grandma (age 87) is about to enter the hospital with a serious medical condition and that she has a taxable estate of $5.1 million, which consists of $1 million in a traditional IRA and $4.1 million of cash, stock and real estate.

Grandma can avoid a federal estate tax liability by doing a Roth IRA conversion of $300,000 from her IRA, which will trigger a $100,000 income tax liability and bring her taxable estate down to the $5.0 million level that eliminates the federal estate tax. If she dies, her family will inherit a $700,000 taxable IRA, a $300,000 tax-exempt Roth IRA, and $4.0 million of cash, stock and real estate.

Distributions received from the $700,000 inherited traditional IRA are taxable income in respect of a decedent ("IRD") Rev. Rul. 92-47, 1992-1 C.B. 198; Private Letter Ruling 200336020 (June 3, 2003), but distributions from the converted $300,000 amount are exempt from taxation.

Had she not done the Roth IRA conversion, the estate would have paid a 35% federal estate tax on the $100,000 of deferred income taxes. If Grandma overcomes the medical condition, she has the option to reverse the Roth IRA conversion anytime before her income tax return is due in the following year (a "recharacterization").

D. Consider Charitable Bequests of IRD, Especially if the Income Tax Rates and the Estate Tax Rates Are Higher in Future Years

1. The projected tax rates for 2013 can mean that IRD can easily be subject to tax rates in excess of 75% though the double-whammy of estate taxes and income taxes. The rate is even higher in the 41 states that have state income taxes. Individuals can let their favorite charity be the governments (via taxes), or they can devote these assets to specific charitable causes that they may care more about.

§ 2055 and 642), every dollar can be transferred to a charity free from any taxes.71

1 In addition, since charities are tax-exempt they can apply all of the IRD toward the individual's charitable purposes.

3. As people investigate the charitable uses of these assets, an attractive option that may benefit children is to contribute these assets to a donor advised fund at a community foundation or to a private foundation. The decedent's children can then have the assets applied toward charitable purposes that are important to them, thereby alleviating them from the burden of using other resources for such gifts. A large donor advised fund or private foundation can increase the child's prestige as a significant contributor to the community.

4. As a general rule it is best to have the IRA or QRP assets transferred directly to the charity or charitable remainder trust after the decedent's death rather than indirectly by way of the probate estate. This will keep the assets off of the estate's income tax return and avoid potentially complicated legal issues. 2 Such a72

transfer can usually be accomplished by having the individual name the charity as the successor beneficiary on the retirement plan.

71 Certain precautions should be taken to assure this result. First, the transfer should be structured to qualify for the estate tax deduction. That deduction could be lost if the amount that the charity will receive is uncertain at the time of death. See Englebrecht and Selmonosky, "Contingent Bequests and Estate Tax Charitable Deductions," Trusts and Estates, Sept. 1997, p. 40. Second, the assets should be kept off of the estate's income tax return to avoid issues concerning the estate's income tax deduction for a charitable contribution.

72 In the event an IRA or QRP distribution is included on the estate's income tax return (for example, because the probate estate received the distribution), there could be a problem claiming a charitable income tax deduction. This could be the case if the estate has any source of IRD. An estate is not entitled to claim a charitable income tax deduction unless the payments to the charity can be traced to the trust's or estate's income. IRC§ 642(c); Reg. § 1.642(c)-3(b) analyzed in Van Buren v. Commissioner, 89 T.C. 1101 (1987) at 1108-1109.

OVERCOMING OBSTACLES FOR CHARITABLE BEQUESTS