Roth Conversion on death bed
I have a client in hospice suffering from Parkinson’s. The estimate is he’ll live till about March. We want to convert is deductible IRA ($580k) to a Roth in 2010. He has already taken RMD for 2010. He has plenty of money to pay the tax. My questions are as follows:
Is tax calculated on conversion date?
Can we send estimated to IRS ASAP (in 2010) to get it out of his estate? Is there a special form to send this with?
If he dies in 2011, and he chose to spread income over 2011 & 2012, then what happens? We are planning to pay it all in 2010, but I’m curious how this would work. I assume all income is brought back into year he died.
In general, is this a good strategy? We want to get as much tax free assets via stretch IRA to his daughters.
For stretch purposes, should we split IRA, daughters have similar ages.
Permalink Submitted by Alan Spross on Fri, 2010-11-19 19:30
The estimated tax for the conversion can be submitted using the 4th quarter voucher contained in Form 1040 ES. If client passes in 2011 and did not opt out of the two year deferral, all the conversion income must be reported in 2011. However, his executor also would be able to recharacterize the conversion up to 10/17/2011 and this might be done if the beneficiaries are in a lower tax bracket than the client. Congress also needs to address the estate tax situation prior to year end, so the unified credit amount should be known soon.
If the taxes for the conversion are paid and the client wants to defer the income, the paid in amount can be tranferred to 2011 by indicating such on the 2010 return.
Converting keeps several options open because of the extended due date for recharacterization of all or part of the converted amount. 10/17/2011 is also the deadline for the final decision on which year to report the income.
Unless the daughters do not get along or cannot be trusted to create separate accounts by the end of the year following client’s death, there is no need to create separate IRA accounts now for each of them.