by pass beneficiary ira and pay only state inheritance tax?
a parent’s rbd was supposed to be 4-1-08 but recently passed. the beneficiaries have been advised to cash in the ira and put the funds in the estate account.
Apparently the heirs will receive the funds as an inheritance and pay the state inheritance tax but not fed inheritance tax.
is this a valid way to cash in the ira without paying the regular state and federal income tax on the inherited ira’s?
Permalink Submitted by Alan Spross on Sat, 2008-02-02 04:36
Usually, the probate estate supplies funds to pay estate or inheritance taxes, but if there is insufficient funding there, the IRA may have to be distributed under state requirements. The distribution will be subject to both income and state inheritance tax in that case.
Many states have decoupled from the federal estate tax unified credit amount and have established a much lower credit threshold than the federal 2mm. And there is no IRD deduction for payment of state inheritance taxes either.
The heirs just need to be totally sure that the information they are receiving is correct, because once the funds are distributed they are fully taxable and cannot be rolled over if an error is discovered post distribution.
Permalink Submitted by Bruce Steiner on Sun, 2008-02-03 15:54
Alan is being polite. The advice that the original poster describes makes no sense. Either he/she received incorrect advice, or he/she received correct advice but misunderstood it.
IRA benefits are subject to both income tax and estate tax, with an income tax deduction for the Federal portion of the estate tax.
The Federal estate tax exempt amount is $2 million. State estate and inheritance taxes vary from state to state (with some states having both estate and inheritance taxes, some having one but not the other, and some having neither, and with the rates and exempt amounts varying from state to state). Depending on the size of the estate, and in which state the IRA owner lived, the estate could be subject to state estate or inheritance tax but not Federal estate tax.
Some states exempt some or all of the IRA benefits from state income tax, and some states don’t have any income tax. So it’s possible for the IRA benefits to be subject to Federal but not state income tax.
Since IRA benefits are not subject to income tax until they are received, in most cases it makes sense to keep the money in the IRA as long as possible. Is there some special reason in this case for the beneficiaries to withdraw the IRA now?
Estate and inheritance taxes are payable in accordance with the Will, or in accordance with state law if the Will is silent. In many cases, the tax clause in the Will provides that the residuary estate pays the estate and inheritance taxes on the IRA benefits. But absent such a provision, in most if not all states, the beneficiaries of the IRA will be responsible for paying their pro rata shares of the estate tax.
A forum such as this can be useful for general information. But the family may wish to consult with competent tax/estates counsel, who can give them specific advice based upon their particular situation and their objectives.
Bruce Steiner, attorney
NYC
also admitted in NJ and FL
Permalink Submitted by Janine Janine on Sun, 2008-02-03 21:26
Bravo! for a well-written, lucid explanation that was easy to follow and understand.
I enjoy reading this forum, and gradually I am learning a great deal from the questions and problems of other people.