| IRAs and Estate Tax…read on:
CLIENT QUESTION:
Dear Lawrence,
I’ve been an avid fan of your “Letter” for quite a while, and you reviewed my trust that was done by others about a year ago, and I’m very grateful for both. I have a fortunate (unfortunate?) situation that my wife’s estate will likely be hit by New York State estate tax. So my question is:
Are IRAs included in NYS for estate tax purposes, and if so, does making the IRA beneficiary my revocable trust bypass the estate tax? Thank you so much for all you do!
MY RESPONSE:
Unfortunately, ALL ASSETS owned by you and your wife are subject to estate tax. What is worse is that retirement plans like IRAs are subject to estate tax and income tax. If the surviving spouse (you are assuming that will be your wife) has more than $7.35 million (plus 5%), then her estate will be subject to estate tax in New York and taxed on dollar one. This is called the “cliff tax.”
One plan to avoid this is not to leave everything to your wife so that she will die with less than the “cliff” amount and pay no tax. Instead, you can leave assets in a trust for the benefit of your wife, but these trust assets will not be added to her estate upon her death. We call this a “bypass trust” because the surviving spouse will enjoy the money, but upon her death, the trust money will bypass her estate. So, your idea of having the IRA pass to a “bypass” trust for the benefit of your wife is one way to save on estate tax, but to do this will cause unfavorable income tax consequences. Oh boy!
The bottom line is that we need to balance estate tax savings with income tax savings, but this balance depends upon the facts and circumstances of each case. Usually, I would prefer to find other assets to fund the bypass trust rather than using retirement plans. |
