Estate Taxes on Large Retirement Plan Balance: Dr. Norma

Dr. Norma is 68. She has a $10 million IRA, a home worth $2 million and few other assets. She wants to leave all her assets to her three children, and save taxes. Among her concerns are the large minimum distributions she faces in a few years, when she reaches age 70½.

Before considering ways to reduce taxes, we first face the question of how estate taxes will be paid if she dies with this asset picture. Assume a $5.25 million estate tax exemption and 40 percent tax rate on assets in excess of $5.25 million. If she leaves the IRA directly to her children, the executor of the estate will be liable for $2.7 million of estate taxes and no assets with which to pay that tax other than the $2 million home. The executor might have to sue the children to try to collect their share of the estate taxes, or somehow forfeit the estate to the IRS and let the IRS figure out how to collect from the children.

To avoid putting the executor in this difficult position, make sure the person who is primarily responsible for paying the estate taxes also has control of the money! For example, make the IRA payable to a trust, and make sure the trustee is the same as the executor of the estate. That way, the executor can be sure the friendly trustee (himself) does not run away with the IRA money before taxes are paid. Or, make the three children co-executors as well as beneficiaries, so they are primarily as well as secondarily liable for the estate taxes.

Another approach is for Norma to buy life insurance to assure the availability of funds to pay estate taxes. Again, she must make sure that the life insurance proceeds end up in the hands of the person who will need them to pay the estate tax.

Next Norma invites everyone she knows to send her ideas for how to reduce the estate tax value of her IRA (and/or how to reduce the income tax impact of required minimum distributions).