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Posted by FB on October 12, 2007, 11:25 pm
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Let's say that one's estate consists entirely of a
tax-deferred account (IRA or 401k) containing $2.5 million.
That exceeds the current $2 million estate tax credit, so is
$500K subject to estate tax? Or, because there is a deferred
tax liability on the $2.5 million, does the law allow
adjustment of the account value to recognize that income tax
liability before determining the size of the estate? Could
an heir withdraw the full account value, pay income tax on
the withdrawl, and then determine the estate value, or is
the estate tax due on the full amount of the account
pre-tax, in addition to the deferred income tax?
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Posted by Stuart Bronstein on October 13, 2007, 11:06 pm
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FB wrote:
> Let's say that one's estate consists entirely of a
> tax-deferred account (IRA or 401k) containing $2.5 million.
> That exceeds the current $2 million estate tax credit, so is
> $500K subject to estate tax?
Yes. Well, actually the entire $2.5 million is subject to
tax, with a credit for the tax that would be owed on $2
million. The difference is that the tax calculated this way
is in a higher bracket than just taxing $500,000.
> Or, because there is a deferred tax liability on the $2.5 million,
> does the law allow adjustment of the account value to recognize
> that income tax liability before determining the size of the estate?
Income tax and estate tax are separate and have little to do
with each other. So the answer to that is no.
By the way, income tax on that amount may or may not be
deferred after death, depending on who the beneficiary and
how it is handled.
> Could an heir withdraw the full account value, pay income tax on
> the withdrawl, and then determine the estate value, or is
> the estate tax due on the full amount of the account
> pre-tax, in addition to the deferred income tax?
Estate tax is due on the full amount, and income tax is due
on the full amount that is subject to income tax unless a
further deferral applies. There may be an estate tax
deduction for income tax paid, or an income tax deduction
for estate tax paid, but I don't know that off the top of my
head.
Stu
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<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
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<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
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<< Copyright (2007) - All rights reserved. >>
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Posted by Herb Smith on October 13, 2007, 11:06 pm
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> Let's say that one's estate consists entirely of a
> tax-deferred account (IRA or 401k) containing $2.5 million.
> That exceeds the current $2 million estate tax credit, so is
> $500K subject to estate tax?
Yes, indeedy. BTW, it is not an "estate tax credit", but
rather an estate tax exception.
> Or, because there is a deferred
> tax liability on the $2.5 million, does the law allow
> adjustment of the account value to recognize that income tax
> liability before determining the size of the estate?
No
> Could
> an heir withdraw the full account value, pay income tax on
> the withdrawl, and then determine the estate value, or is
> the estate tax due on the full amount of the account
> pre-tax, in addition to the deferred income tax?
The second one. BTW, the heir may have an income tax
deduction for the estate tax paid on a portion of the IRA
account.
In addition, there is NO stepup of basis in the tax deferred
account so income tax is due on the entire amount, when
distributed.
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>
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Posted by FB on October 14, 2007, 10:11 pm
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>> Let's say that one's estate consists entirely of a
>> tax-deferred account (IRA or 401k) containing $2.5 million.
>> That exceeds the current $2 million estate tax credit, so is
>> $500K subject to estate tax?
> Yes, indeedy. BTW, it is not an "estate tax credit", but
> rather an estate tax exception.
>> Or, because there is a deferred
>> tax liability on the $2.5 million, does the law allow
>> adjustment of the account value to recognize that income tax
>> liability before determining the size of the estate?
> No
>> Could
>> an heir withdraw the full account value, pay income tax on
>> the withdrawl, and then determine the estate value, or is
>> the estate tax due on the full amount of the account
>> pre-tax, in addition to the deferred income tax?
> The second one. BTW, the heir may have an income tax
> deduction for the estate tax paid on a portion of the IRA
> account.
>
> In addition, there is NO stepup of basis in the tax deferred
> account so income tax is due on the entire amount, when
> distributed.
Thanks for your reply. Given that the full value of the
tax-deferred account would be subject to the estate tax and
income tax, it would seem prudent for the account holder to
withdraw the full account while alive, pay the income tax,
and leave a smaller estate subject to estate tax (if any).
Of course, the account holder would lose the value of
tax-deferred growth of the account, but the double whammy of
income and estate tax on the whole amount must be more
onerous.
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>
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Posted by joetaxpayer on October 13, 2007, 11:06 pm
Please log in for more thread options FB wrote:
> Let's say that one's estate consists entirely of a
> tax-deferred account (IRA or 401k) containing $2.5 million.
> That exceeds the current $2 million estate tax credit, so is
> $500K subject to estate tax? Or, because there is a deferred
> tax liability on the $2.5 million, does the law allow
> adjustment of the account value to recognize that income tax
> liability before determining the size of the estate? Could
> an heir withdraw the full account value, pay income tax on
> the withdrawl, and then determine the estate value, or is
> the estate tax due on the full amount of the account
> pre-tax, in addition to the deferred income tax?
The issue is addressed by the "income in respect of a
decedent" (IRD) rules as described in great details at:
http://www.nysscpa.org/cpajournal/2000/0900/features/f93400a.htm
If the scenario you describe has not yet occurred, I'd first
ask if there's a spouse, in which case the use of a properly
set up trust can allow for the unlimited marital transfer,
and preserve the $2M for the other beneficiaries.
Alternately, the use of Roth conversions can reduce the
estate, and give the beneficiaries a 'denser' inheritance.
(i.e. one no taxable at all). Last, one can gift $12K/yr to
any number of recipients during their lifetime, another way
to get money out of one's taxable estate.
Joe
www.joetaxpayer.com
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
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