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Retirement Accounts and Estates

There are a number of retirement account options that get tax benefits (these accounts are called "tax qualified" in the industry). Think of the Traditional IRA or a 401(k). The government wants you to save for retirement (so that it doesn't have to spend as much) so it gives you incentives to put some money away.

But you can bet on this: if the IRS didn't tax it when you saved it, they'll be sure to get their share another way. With a traditional IRA, the government imposes a tax penalty if you withdraw early and, later on, they force you to withdraw a minimum amount (the Required Minimum Distribution or "RMD") so they can tax your withdrawal as income. Any money that comes out of the account, it seems, gets hit with a tax. If you were to pass away and leave a substantial IRA, your beneficiaries may even get hit with a substantial tax because their inheritance is now income (instead of a mere gift) received all in one tax year and, quite possibly, putting them in a higher tax bracket!


Many tax qualified accounts allow for rollover. That means the person who inherits the tax qualified account can keep it tax qualified (and, many times, you can also turn it into a different tax qualified account with a different company). Spouses get the most privilege - they have the same rights as their spouse who passed away. Children can also typically take advantage of the rollover, but they don't get as many privileges. They might not have to pay the taxes right away, but their retirement accounts are more vulnerable to creditors.


My favorite strategy is to use the tax qualified accounts for charitable purposes. If you gift your tax qualified accounts to charity, the charity doesn't have to pay an income tax.

Say you leave behind $100,000; $90,000 in a bank account and $10,000 in an IRA. 30% each goes to 3 kids and 10% goes to charity. The typical way be for the $90,000 account to be split 30/30/30/10 and for the IRA to be split 30/30/30/10. Because your kids probably have an income, they'll pay income tax on their IRA share. Let's say they pay a combined federal and state tax rate of 20%: 20% of $9,000 is $1,800.

That's $1,800 that goes into the governments pockets that could have gone into your children's. With the right planning (or the right attorney if it's too late to plan and you're administering) you can give the entire $10,000 IRA to charity and the kids can split the $90,000 income tax free!

Your estate planning attorney can help you plan your estate to consider your options, minimize your tax, and maximize your gift.

Cornerstone Law, LLC does not provide legal advice through this website; legal advice, by its very nature, requires a full understanding of your personal situation and can change from jurisdiction (your location) to jurisdiction. This website does not intend to provide legal advice, but instead, provide a general background education on different legal topics. If you would like legal advice, please contact Cornerstone here.

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