The beneficiaries of tax-protected retirement accounts like 401k)s, IRAs, annuities, savings bonds, etc. should keep in mind the future tax liablity for those accounts. In some cases it can be substantial.
Many estate tax payment vehicles like irrevocable life insurance trusts (ILITs) are used to help clients pay the taxes due on retirement accounts. Another option that helps with this future tax bill is converting a traditional 401(k) to a Roth so you pay the taxes now so your heirs won't have to.
Currently, the federal exemption for estate taxes is $5 million, and it will stay that way through 2012. But many states have their own estate taxes as well, and some money in qualified retirement accounts that are left in an estate can be subject to double taxation because of them. This makes planning even more important.
Heirs who receive retirement accounts often pay far more tax on IRD, income in respect of a decedent, than they have to, collecting payments from the plan but failing to take an annual deduction that is available to them. Sometimes that can occur because although the the tax attorney who planned the estate knew about the deduction, the accountant who prepares the heir’s taxes did not.
“That could go on for 20 years,” says Don Williamson, Executive Director of the Kogod Tax Center at American University. “People will just forget to pick up the deduction.”
For more information on estate planning, visit our website and watch Dennis Sullivan, Esq., CPA, LLM on the National talk show, "Ask the Lawyer," discuss strategies relative to estate & tax planning. To learn more about this complex tax and estate planning area, register online to attend one of our Trust, Estate & Asset Protection workshops.