How Estimate The Equivalent Value of An IRA Vs A House?
I would appreciate views of how one can estimate the equivalent value of a house and a traditional IRA.
My house has a stable market value of $1.5M. and I have a $3M TIRA and a negligible amount in non-retirement funds. My 50-50 estate and TIRA beneficiaries are 2 adult sons, one of whom would like to acquire the house once I’m deceased but will not have the funds to buy out his brother.
I could change my estate plan so that son 1 gets the house and son 2 gets most of my TIRA, an arrangement agreeable to both of them. The problem is that I don’t know how to value this IRA to reach an equitable division since distributions from the IRA will carry a U.S. tax of 28-33% for RMD’s and 35% for any major distribution and any growth will be similarly taxed. In contrast the house could always be sold with no taxation except on any capital gains (15% tax if long-term).
While all the values and tax rules will change before my death in perhaps 5-15 years (I am 79), I still would like to understand matters better by a hypothetical exercise as though present-day values and taxation will apply at my death. I realize that there could be problems in allocating the IRA but would perhaps name son 2 as my IRA primary beneficiary and son 1 as the secondary beneficiary with the idea that son 2 (whom I trust) would disclaim the appropriate amount of the IRA,
E.g., IF the equitable value for the IRA was 66.66% (?) of its nominal value of $3M, that [u]equitable[/u] value would be $2M which is $500K [= $750K nominal value] more than the house, an excess which could then be divided 50-50. Then son 1 should get the house and $375K (nominal value) of the IRA disclaimed by son 2; son 2 should get the other $2.625M (nominal value) of the IRA. Then each would have $1.75M in equivalent value.
Thank you for your comments.
Permalink Submitted by Alan Spross on Fri, 2007-09-21 03:34
Of course, there are several potential models to address this, similar to what you propose. But the first question that leaps out is what provision is there for payment of any federal estate tax or state estate tax, since several states have decoupled from the federal rules. Come 2011, you might expect a new unified credit of something more than 3.5mm, perhaps 5mm, which would come close to elimating the problem. Your RMDs are going to get real large in your 80s, so converting additional amounts may not be wise unless your sons are also expected to be in a similar bracket in retirement. Roth conversions would shrink your gross estate however, and could be part of a later year strategy. The income limits are gone in 2010, and RMDs do not count in any event.
You could also set up an additional IRA account by simply partitioning the current IRA with the same % of each investment being transferred, such that each son would inherit their own IRA of appropriate size and tax adjusted. Periodically, if the values of the house and IRAs diverge, you could easily rebalance the IRA amounts.
If you wanted to convert some to a Roth for any reason, you could have two Roths as well as two TIRA accounts with identical investments and the ability to equalize them with same custodian transfers. IRA accounts for each son might well eliminate the need for disclaimers.
There are probably various other approaches involving the purchase of some life insurance with the RMDs, etc. depending on your insurable status.