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Posted by Herb Smith on November 24, 2006, 11:34 pm
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Han wrote:
> Hypothetical situation:
> Happy, healthy couple has potential estate valued at over $2
> million, wanting to bequeath proceeds (whatever it's called)
> to children for the benefit of grandchildren (each child has
> some children). The major portions of liquid/semiliquid
> funds are in IRA-type accounts (IRA, Roth, 403b7).
>
> Advice was given that even via trusts, the proceeds would
> count as income to the recipients, and thus would be subject
> to income tax, even if not subject to US or NJ estate taxes.
True enough, the funds were likely never taxed when
contributed (i.e. deductible IRA or tax-deferred employer
plan) so someone has to pay the income taxes when funds are
withdrawn after death. On what schedule, depends on the ages
of the beneficiaries and whether or not the decedents had
reached their RBD (generally age 70-1/2 or above). The Roth
IRA would probably be TAX-FREE if it had been in existence
for more than 5 years and the decedent taxpayer was over age
59-1/2 (qualified distribution). If not, withdrawal of
contributions will be tax-free, but there may be tax due
when the earnings are withdrawn.
> One suggested alternative would be to set up life insurance
> policies with the grandchildren as beneficiaries.
The taxpayer can always buy life insurance and name the
grandchildren as beneficiaries. Using the IRA funds to buy
or pay the premiums for these policies would be a
"prohibited transaction" and would immediately invalidate
the tax-deferred status of the IRA.
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