Naming IRA Non-Spouse Beneficiary to Avoid Estate tax
Can a married IRA owner name his-her adult child as primary beneficiary of his-her traditional IRA and avoid estate (and Gift) tax on the balance of that IRA account given the following:
(1)IRA account owner is the first spouse to die of the couple,
(2)surviving spouse has adequate income and assets otherwise to live on,
(2)IRA account balance at death is no more than IRA owner’ estate tax exemption
amount.
Is this a viable method of “using up” the first-to-die spouse’s estate tax exemption amount, so it is not wasted when surviving spouse finally dies? Does naming a non-spouse IRA beneficiary effectively remove these IRA assets from estate of surviving spouse and also “use” first-to-die spouse’s exemption amount, so that the married couple “never” pays any estate tax on those IRA assets?
Any complications here? Any gift tax implications?
Permalink Submitted by Alan - IRA critic on Sun, 2014-07-06 03:57
The IRA owner could do that, but with portability of the decedent’s unused estate tax exemption it really is not necessary since decedent could leave the IRA to the spouse directly and the surviving spouse needs to be sure a 706 is filed to properly elect portability of decedent’s unused exemption to the spouse. Either way, gifting is not involved since no assets are transferred by lifetime gifts. http://www.journalofaccountancy.com/News/20125895.htm
Permalink Submitted by David Mertz on Sun, 2014-07-06 13:32
Leaving assets to a non-spouse could be useful with regard to using up a state estate tax exemption even though DSUE makes it unnecessary for federal estate taxes.
Permalink Submitted by mk foss on Sun, 2014-07-06 22:07
There is no estate tax savings or gift tax when a NonSpouse is named as beneficary. If the IRA owner lives in a community property state the suviving spouse may be considered to have made a gift of his/her community property share to the named beneficiary. If it’s a separate property IRA in a community property state, the custodians will give them a hard time in trying to name a beneficiary other than a spouse.
Permalink Submitted by Bruce Steiner on Sun, 2014-07-06 22:47
There could be a transfer tax benefit since portability is not indexed for inflation, and there’s no portability for GST tax purposes. However, most IRA owners leave the IRA to the spouse, so the spouse can roll it over, name new beneficiaries, and potentially convert to a Roth.