IRA & Exemption question
Appreciate your help on this question…
Husband names wife as primary IRA beneficiary and children as contingent beneficiaries
If wife disclaims a $500k IRA and the children
inherit the IRA, is the $2 million (2008) exemption reduced by $500K?
Permalink Submitted by BruceM on Wed, 2008-08-06 21:45
Yes, but let me explain
At death one does not receive a $2,000,000 exemption….they receive a unified estate tax credit of $780,800 (2006-2008) that is used against any net estate tax due in the year of death. The credit represents the amount of estate tax on $2,000,000 of the decedent’s taxable estate.
If all (or most) assets pass to a spouse at death and the value of the surviving spouse’s estate exceeds $2MM, then due to the unlimited marrital deduction, even though the decedent did not pay estate tax, the spouse likely will when they die. To make the greatest use of the unified estate tax credit, it is often advised by estate planners to pass up to $2,000,000 of the decedent’s estate to a non-spouse beneficiary to make full use of the credit…and a spousal disclaimer is one way to do this, providing it is done correctly.
It is always advisable to speak with an estate planning attorney when developing these plans, as there may also be a state death tax to consider.
BruceM
Permalink Submitted by Eric Radman on Wed, 2008-08-06 23:26
Thanks, BruceM. I understand your point. But just to clarify…
If Wife disclaims the $500k IRA and it goes to children tax free (they
are the contingent beneficiaries), the Unified Credit Trust
set up for the deceased Husband will be reduced by $500k.
In order words, the estate can’t get the benefit of an inherited IRA tax free
AND get the full Unified estate tax credit of $780,800.
Is my thinking correct?
Permalink Submitted by Alan Spross on Thu, 2008-08-07 00:46
Right. The estate tax on the non spouse inherited IRA is part of the 780,800 and therefore reduces the balance to be applied to other assets.