Word: iras
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Dates: during 2000-2009
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...leave behind $1 million in real estate and $2 million in an IRA. The estate tax comes to about $1 million, allowing for standard deductions and exemptions. But your estate will owe an additional $800,000 right away if heirs take the IRA as a distribution rather than leaving it intact to continue growing tax free. What might force such a distribution? If no beneficiary is named on the IRA and you are past age 70 1/2 at the time of death, it automatically gets liquidated, with taxes due. But even if you've named a beneficiary...
These documents are essential to any estate plan. But think twice before giving one of your children durable power. That grants the authority to do things like change IRA beneficiaries. If two children fight and only one has durable power, the other could get cut out. Grant joint durable power, or go outside the family...
...good news is that IRAs, so tax efficient during your lifetime, can be tax efficient for heirs too. Properly handed down, an heir can stretch out mandatory distributions over his or her remaining lifetime, giving the savings an additional 40 or 50 years to grow tax free. "The key is to pass IRA savings on to heirs intact so the money keeps growing long after you are gone," says Ed Slott, editor of Ed Slott's IRA Advisor. The travesty, Slott says, is that many estate planners are well versed in how to handle real estate, a family business, stocks...
First, make sure you've designated a beneficiary on every IRA account. That's not enough, though. Keep copies. You can't rely on a financial institution to have documents 20 or 30 years after an account was opened. Decades of bank mergers have resulted in lousy financial records throughout the system. If you fail to name a beneficiary or if no one can prove that you did, your IRA may be liquidated and taxed. Then the proceeds can be added to the estate and taxed again--as in our opening example...
...also want to make certain that heirs have the means to pay the estate tax without taking an IRA distribution. If the estate does not include enough liquid assets to cover the tax bill, consider a life-insurance policy that pays when the second spouse dies. That's when the bulk of your estate gets handed down. Such a policy should be put in the heir's name and funded through annual tax-free gifts...