How can ILIT pay estate taxes for Roth IRA?
The traditional ways for an ILIT to transfer cash death benefits to an estate or living trust for use in paying estate taxes are: (1) buy assets from the estate/trust, (2) make a loan to to the estate/trust. I don’t see how either of these would be effective for an estate dominated by a Roth IRA sufficiently large to trigger substantial estate taxes (you can’t buy an IRA, or be repaid on a loan from an IRA). Is there an ILIT process, or any other solution, to this problem?
Permalink Submitted by Al Fry on Sun, 2008-08-10 00:24
Why not just have the Roth benes own the life insurance and be the bene?
Permalink Submitted by Bill Hunter on Sun, 2008-08-10 12:28
I want to make sure the estate taxes on the Roth IRA are paid.
Permalink Submitted by Bruce Steiner on Sun, 2008-08-10 14:17
Unless the Will provides otherwise, the estate tax attributable to the Roth IRA is payable by the recipients of the Roth IRA. If the recipients of the Roth IRA don’t have other money with which to pay the estate tax, the insurance trust can distribute money to them (if they are beneficiaries of the insurance trust, which is likely to be the case), the insurance trust can lend money to them, they can borrow money from another source, or (at the cost of destroying the stretchout) they can withdraw money from the Roth IRA. There may be other possibilities as well.
The Roth IRA owner (and the persons involved after his/her death) should consult with competent tax/estates counsel for specific advice as to how best to proceed in that particular case.
Bruce Steiner, attorney
NYC
also admitted in NJ and FL
Permalink Submitted by Bill Hunter on Mon, 2008-08-11 13:33
Thanks Mr. Steiner for your suggestions. Just to be sure I fully understand, I am assuming that your suggestions would not result in “incidents of ownership” w.r.t. the death benefit causing it to be included in the insured’s estate/living trust. Is that correct? Again, thanks.
Permalink Submitted by Pat Tracy on Mon, 2015-04-27 14:54
Sorry, but I thought ROTHs were totally exempt from taxes… did I miss something?
Permalink Submitted by Jose Morales on Mon, 2015-04-27 16:49
They are not subject to income tax but they are included in calculating the estate tax.