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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75381  
Subject: Re: IRA and next generation beneficiaries Date: 2/16/2000 9:02 PM
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kpgould: "In the last year,I have rolled my 401-K into an IRA and have been doing my own foolish investing. I am 52 and after crunching some estate planning numbers, I am delighted to find that my IRA, which is healthy, will not be needed in retirement. So I will have the advantage to foolishly invest for the very long term for the benefit of my grandchildren yet to be born. My question is as follows:

As I read the estate tax laws, it seems that if I designate a "next generation" beneficiary, that when I begin forced withdrawls at age 70 1/2, I will be able to minimize them because they will be based on a combination of both mine and the beneficiary's age. And that at my death, the beneficiary receives the IRA with no estate tax penalty, but must continue to withdraw the taxable dollars based on the IRS schedule. But the key to this is that the IRA is not figured into the taxable estate. Do I have this correct??? I have read the regs on the IRS site, and it seems to say this, but one cannot be to careful. Anyones help in pointing me to a definitive answer would be appreciated."


I am no expert, but as I understand the rules, if anyone other thanyour spouse is named as beneficiary, then the lowest age you can use for the joint life expectancy is 10 years younger than your age. The IRC is way ahead of you here. If you collect yourself a "young honey" (or "young hunk" as the case may be) for a spouse, then you may use her/his actual age.

You are also mistaken in believing that the IRA is not counted in your taxable estate for FET purposes. It may pass outside of probate, BUT IT IS MOST DEFINITELY IN YOUR ESTATE FOR FET PURPOSES.

In addition, if do pass more than a certain amount (currently $1,000,000 IIRC) to a generation younger than your children, IOW you grandchildren or great granchildren, then there is also a generation skipping tax (GST) that will be imposed. From what I understand, it can be a PITA. Also, "criser" has previously suggested that many estae planners start looking into generation skipping transfers if you estate exceeds $2-3MM; details can vary and may also depend on how well off your children already are.

In addition, IIRC, the other beneficiaries receive no step-up in basis for assets within the regular IRA and they will owe ordinary income tax on the withdrawals. I have read from several sources that it may be better for planning purposes to use up the regular IRA and pass along cqpital assets that will receive a step-up basis and may receive LTCG tax treatment.

Anotehr planning idea that I have heard of is to convert all or some of the regular IRA to a Roth IRA. Funds used to pay taxes on the conversion will n longer be part of the estate for FET purposes, in addition, IIRC, Roth IRAs do not require MRDs at age 70 1/2.

You have some wonderful planning opportunities avilable to you, but I do not think that it is entirely a do it yourself project, but it is certainly well worth it, IMO, to have some idea of what will be involved before speaking to your professional advisor.

There is an Inheritance board here on TMF, and there is also an Estate Planning board here on TMF in Speakers' Corner; you may wish to peruse both of those boards, too.

Just my $0.02. Regards, JAFO

Disclaimer

Yes, I am a lawyer, BUT THIS IS NOT LEGAL ADVICE; it is only general information. NO CLIENT RELATIONSHIP IS INTENDED TO BE CREATED, NOR IS ANY SUCH RELATIONSHIP SO CREATED. FOR SPECIFIC LEGAL ADVICE YOU SHOULD TALK TO A LAWYER IN YOUR AREA.


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