Multiple Estate Planning Issues
I’m trying to pick up the pieces for the lack of estate planning advice my parent’s received (or sought out).
My father (71) passed away in June with no estate planning in place. My parent’s combined estate is worth about $4.6M. All assets seemed to be titled as Joint Tenants as opposed to Community Property even though they lived in CA (not sure why). The $4.6M is made up of a $3M taxable stock account, $600K dad’s IRA, $200K mom’s IRA, and $850K primary residence, owned free & clear. Unfortunately, the taxable stock account has already been switched into my mom’s name and my dad’s IRA has already been rolled over into a new IRA in my mom’s name. I’ve since learned that if this had not been done my mom could have disclaimed the IRA so it went to my sister and me and therefore could have gotten that $600K out of my mom’s estate. Is there any way to undo this since she has not taken any distributions out of that IRA? I don’t think so but thought I would ask. I think the only thing left for my mom to disclaim is her house so that we can at least use up some of my dad’s $2M estate tax exemption. I (40) live in Arizona and my mom (70) and sister (42) live in CA. My sister and I are each married and she has 3 young children and I have 2.
I’ve tried to do some research including reading Ed’s book [i]Parlay Your IRA Into a Family Fortune[/i]. I will be going to an attorney and CPA with my mom but just wanted to make sure I’m going down the right path.
Gifting – For 2008, the biggest gifts will occur. We will use up my mom’s $1M lifetime gift exemption by gifting $500K to my sister and I from the taxable stock account, set up 5 separate $60K §529 plans for the grandchildren and use up the $12K per person annual exclusion for my sister and I and our spouses. Each subsequent year we will have her gift the $12K annual exclusion (or whatever it changes to) to all 9 people (with the exception of ’09-’12 when the grandkids can’t get anymore due to the lumpsum §529 gifts).
The taxable account was held in both parents’ names as Joint Tenants. The basis of the $3M taxable account was really low as held by my parents, but will the entire account get a step-up in basis as is done with community property assets? If yes, great, if not, when my mom gifts stock to my sister and I, can we specifically allocate the shares she gives as the half that did receive step-up in basis? At least this way the big gifts in ’08 won’t be subject to significant capital gains taxes if they are sold in the near future and what’s left in my mom’s account will eventually get stepped up when she dies.
The $850K home was also held as Joint Tenants. Basis is probably around $30K. It is my understanding that even though it was held as Joint Tenants that because it was real property that we could petition to have it treated as a Community Property asset as thus have the entire property receive a step-up in basis. Once this is done she could then disclaim and have the property pass to my sister and me. I least I think we can do this but I’m not 100% sure.
Assuming we can’t undo my dad’s IRA transfer to my mom, and my mom doesn’t need the money in the IRAs, doesn’t it make sense to convert the traditional IRA into a Roth IRA? RMDs aren’t required with Roth IRAs and she could use money from the taxable account to pay for the taxes on the conversion, thus keeping a larger portion of money growing in a tax free account and lowering my mom’s overall estate (by the amount of taxes paid on conversion). And does it make sense to convert it all at once, paying the taxes and stopping the RMDs or is it better to convert it over in smaller amounts, say $100K or $150K per year to keep the conversion tax out of the 35% tax bracket?
Roth IRA beneficiaries – If I want my half of my mom’s IRA to go to my kids so that the stretch is stretched out as long as possible, should I have my mom change from me as the 50% beneificiary of her IRA to some type of conduit trust with my kids as the beneficiaries of that conduit trust. It’s my understanding that if we simply named my kids the stretch could be affected since minor children are not able to make tax elections, such as IRA distribution elections.
I’m assuming that even after all of this is done we’ll have to use insurance, such as an ILIT, to take care of the remainder of the estate tax problems.
Thanks in advance for any help on this.
Permalink Submitted by Bruce Steiner on Mon, 2008-07-21 23:03
Doing your own research is hard. It’s good that you’re consulting with counsel.
You should have your lawyer look closely at the regulations regarding disclaimers, and the relevant rulings, to see if it’s still possible for your mother to disclaim her survivorship interest in the joint brokerage account.
By not disclaiming your father’s IRA, your mother retained the opportunity to convert it to a Roth IRA. There is a tradeoff between converting to a Roth all at once (which gets more money into a tax-free environment sooner but bunches the income into a higher bracket) and spreading the conversion out over a number of years. You or your lawyer may want to run some numbers to see which approach seems to make the most sense in this case.
Your mother may want to provide for her children in lifetime trusts rather than outright, to keep your inheritance out of your estate for estate tax purposes, and to protect against potential creditors (including spouses).
The stretchout would be greater if your share of the IRA instead went to or in trust for your children. Of course, you have to be sure that you’ll never need that money. (If you’re not sure, you or a trust for your benefit could be the beneficiary, and you could disclaim your interest if it would then go to or in trust for your children.)
Conduit trusts rarely if ever make any sense. If the beneficiary lives to life expectancy, nothing will be left in the trust. I don’t know why so many people suggest them. Why not let the trustees decide how much to distribute, and when?
529 plans are not necessarily a good idea. They use up the gift tax annual exclusion. There is no practical way to get the money out except for education. Your mother could instead give each grandchild $12,000 each year, either outright or in trust (and if in trust, the trusts could be set up so that she pays the income tax on the trust’s income and gains). In addition to the annual gifts, she can pay their tuition, and you can pay their other educational expenses. That way, the grandchildren get BOTH the annual gifts AND their education.
Life insurance is not necessarily a good idea. If she lives to her life expectancy, the trust would have been better off investing the same amount of money in other assets.
The estate tax exempt amount is scheduled to increase to $3.5 million in 2009. No one knows what the tax law will be going forward, but there’s a good chance that the exempt amount will settle at $3.5 million. If that happens, and if your mother can disclaim her survivorship interest in the joint brokerage account (the amount involved is enough that it’s worth having your lawyer look at this carefully) and in the residence, then there’s a good chance there won’t be any estate tax in her estate.
Bruce Steiner, attorney
NYC
also admitted in NJ and FL
Permalink Submitted by Jim Bozarth on Tue, 2008-07-22 00:19
Thanks for the reply Bruce. I’ve read a lot of your replies on other topics and they’re all really good. Thanks again for helping out with this forum.
Permalink Submitted by Alan Spross on Tue, 2008-07-22 01:40
Just a couple comments:
1) As Bruce intimated, there is no way to reverse the assumption of ownership of the IRA. That action eliminated a qualified disclaimer of the IRA.
2) Your mother could disclaim your father’s interest only, but not her existing CP interest or JT interest for that matter. In CA, the presumption is that JT property is community property, although that could be challenged in certain circumstances. Things get complex if such things as quasi CP or commingled separate property has been included such as inheritances, gifts or pre marriage assets. From a practical standpoint, you don’t have anything to worry about from the IRS, the only potential problem would be other parties that might benefit from having some of the joint property become separate property.
3) For what it’s worth, I totally agree with Bruce that the upcoming debate over the unified credit is highly unlikely to result in a credit below the 3.5 mm that kicks in as of January. Obama is proposing that including a separate marital share of another 3.5 mm, but it is not clear if that would include deaths prior to a future date. If McCain gets in and the Senate retains 41 Repub votes, the unified credits will probably be higher.
4) You probably realize that the 529 gifts over 5 years would revert to your mother’s estate @ 20% per year to the extent that she does not survive the 5 year period.