Based on the aforesaid assumptions, the individual $2,500,000 total assets would be distributed as follows:
a. Child A would receive: (1) the $1 million IRA passing outside of the individual’s estate planning documents; (2) the $200,000 cash gift the individual elected to leave A to compensate for the income taxes A will pay on the IRA distributions; and (3) $150,000 cash, investments and real estate, or $1,350,000 total; and
b. Child B would receive $1,150,000 cash, investments and real estate, with no benefits under the IRA, and no compensating adjustment since B will not be paying taxes on IRA distributions.
On an after-tax basis, A receives 800K worth of IRA plus 350K [i.e., 200K + 150K] worth of cash, investments and real estate, or $1,150,000, total, net of taxes. Had there been no tax planning, A would have received $1,150,000, net of taxes, so A's situation remains the same.
B, on the other hand, now receives $1,150,000, income tax free, or $100,000 more than B would have received, net of taxes, had there been no tax planning [i.e., $750,000 cash, investments and real estate, plus $300,000 after-tax value of one-half interest in IRA].
Each child receives an identical amount, net of taxes, and the family as a whole comes out $100,000 ahead. These tax advantages could obviously be even greater if the IRA were left to grandchildren or great grandchildren in lower tax brackets, subject to the potential application of the so-called “Kiddie Tax.”
The above-outlined plan has the additional benefit of essentially treating the new tax law as an estate tax on the individual’s estate. Most individuals wish for their assets to pass equally to their children at their deaths, after all taxes. The above tax-wise IRA beneficiary plan helps carry out this intent, saving the family significant tax dollars, in the process.
James G. Blase, CPA, JD, LLM, is principal of Blase & Associates LLC, a St. Louis-area law firm practicing primarily in estate planning, tax, elder care, asset protection, and probate and trust administration. Mr. Blase is also an adjunct professor at the St. Louis University School of Law and the Villanova University Charles Widger School of Law.