IRAs are included in the gross estate whether paid to the estate or outright to a beneficiary. However, with an estate beneficiary, the assets are also subject to probate.

Assets left to the spouse or received by the surviving spouse in a probate action are eligible for the unlimited marital deduction. These assets would not be subject to estate tax for the decedent, but would be when the surviving spouse passes later. In contrast, if left to someone other than the spouse, the assets would be potentially taxable in decedent’s estate. Any long term estate planning now is extremely difficult since the exclusion moves to 3.5 million next January. Current law calls for no estate tax in 2010, and only a 1mm credit in 2011, but the situation for 2010 and 2011 will almost certainly be changed, and the level of change will be affected by the November election.

State estate or inheritance taxes are becoming an increased factor to consider, with more people affected by state taxes and less by federal estate taxes as we go forward.

If a client names his kids as IRA beneficiaries, those assets will utilize whatever the unified credit is in the year of his death and keep the assets out of his spouse’s estate. He may want to consider various trust arrangements to make sure his spouse is taken care of.

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