Large IRA and IRD: Income In Respect of a Decedent

Large IRA and IRD: Income In Respect of a Decedent
by: Rocco Beatrice



Jumbo IRAs, large 401Ks, and other qualified pension money are subject to
a double tax up to 80% if the owner of the large IRA dies with an estate
tax problem.

IRD: "Income in Respect of a Decedent" Internal Revenue Code Sec. 691(c)
refers to those amounts to which a decedent was entitled to receive as
gross income, but which were not properly includable in computing the
decedent's taxable income for the taxable year ending with the date of
the decedent's death or for a previous taxable year under the method of
accounting employed by the decedent.

Rev. Rul. 92-47 holds that a distribution to the beneficiary of a
decedent's IRA is IRD ("Income in Respect of a Decedent") under Sec. 691.
The amount of the IRA distribution is included in the gross income of the
beneficiary for the tax year when it is received. However, Sec. 642(c)(2)
provides that an estate or a trust shall be allowed a deduction for any
amount that is permanently set aside for charitable purposes.

Reg. 1.691(a)-1(b). IRD assets are those in which there is either untaxed
ordinary income or a deferral of capital gain. When the beneficiary
receives the asset, the beneficiary is subject to taxation on the asset,
just as the original owner would have been subject to such taxation if he
or she had recognized the income or gain.

A decedent's gross estate includes the value at the time of decedent's
death of "all property, real or personal, tangible or intangible,
wherever situated." See IRS Code Sec. 2031(a). A decedent's estate may
include stocks and securities, real estate, business interests, personal
effects, annuities, trusts, 401Ks, IRAs, and other qualified plans. Each
of these items is subject to a valuation determination as set forth in
IRS Reg.20.2031-1.

When IRA is Subject to Double Taxation

If you are over the age of 60+ and you have assets subject to an estate
tax, your IRA is guaranteed to be subject to a double taxation (75% or
more) under IRS Code Sec. 961(c).

Example: If you have a $5million estate and a $1million IRA (Jumbo IRA /
Large IRA), because of IRD "Income in Respect of a Decedent" your heirs
will only get $250,000. The government has written itself in for a
guaranteed $750,000 because you voluntarily did not mitigate this
double-tax penalty.
Large IRA (Jumbo IRA) $1,000,000
Estate Tax*: ($500,000)
Income Taxes (state** and federal*): ($250,000)
Total Taxes on Large IRA*: ($750,000) (i.e. 75% or total)
Total IRA distributed to your loved ones, the beneficiaries: $250,000
(i.e. 25% of total)

* For illustration purposes only. Japan has a higher rate of 70%, Germany
takes a maximum of 40%, while Australia and Canada, take nothing.

** Taxes on inherited wealth are a traditional and common revenue source
for states. Some 16 states collect approximately $4.5 billion per year
from these taxes. Illinois, Maine, Maryland, Massachusetts, Minnesota,
New Jersey, New York, North Carolina, Oregon, Rhode Island, Vermont, the
District of Columbia, Connecticut, Kansas, Oklahoma, and Washington. The
estate tax in Wisconsin expired effective July 2007 and in Kansas and
Oklahoma will expire effective 2010.

Simply stated, IRD is income a decedent earned and was entitled to
receive but never actually received before his or her death. An example
would be a paycheck for wages not paid until after death. The paycheck
would be included in his estate for estate tax purposes and is taxed to
whoever received the check.

IRAs, 401Ks, and other qualified retirement plans are considered to be
IRD property when received by a beneficiary. Other IRD assets are: Unpaid
bonuses, unpaid interest, dividends, fees, commissions, installment
notes, rents, sale proceeds on sales before death.

Tax Planning IRA

Tax planning for large IRAs, Jumbo IRAs, 401Ks, and other qualified large
pension assets can pose a number of complex problems, resulting mostly
from the interplay of several distinct set of tax rules. On the death of
the IRA owner, the IRA and other qualified plans, face a potential double
tax hit. First, the fair cash value of the asset is includable in the
taxable estate for estate tax purposes up to 55% plus applicable state
taxes on the same amount (State estate taxes and federal estate taxes are
two separate taxes). Second, payments from the IRA to other beneficiaries
are subject to the income tax, based on the theory that no income taxes
were paid during the life of the original IRA owner.

Further complicating large IRA planning is made more difficult by the
some time complex rules on mandatory "Required Minimum Distributions"
(RMDs) applicable to IRAs imposing a 50% penalty tax on amounts that
should have been distributed.

Required Minimum Distributions (RMDs) generally are minimum amounts that
the IRA owner must withdraw annually, starting with the year that he or
she reaches 70 1/2 years of age or, if later, the year in which he or she
retires.

IRA Rescue Planning

IRA rescue planning is a term used to take positive action to eliminate
the estate tax and to mitigate the income tax consequences of a double
tax on large IRAs, 401Ks, and other qualified pension plans. Because of
the devastating tax consequences, the first objective is to create a
scenario to pass more wealth to heirs.

Stretch IRA Beneficiary – Avoiding Income Taxes on IRA

One solution that works, if you do NOT have an estate tax problem, is the
Stretch IRA. As the name implies "stretch" the designated beneficiary is
someone other than the owner, such as your child or grandchild.
Distributions are "stretched" over the life expectancy of the child
(instead of the IRA owner). Essentially this is to avoid the "lump-sum"
payment of income taxes on the IRA, by stretching distributions over the
life of the child or grandchild.

As stated, IRA rescue is much more important if you have an estate tax
problem. Stretch IRAs do NOT work for those that have an estate tax
problem. If you pass an IRA to a child/beneficiary through a Stretch IRA,
your estate will have to deal with the 55% estate tax, which is due when
passing that asset to their heirs. Where is the child going to get funds
to pay the 55% tax? Why the IRA of course. The problem is that the
beneficiary will have to pay income taxes upon taking the money out of
the IRA to pay the estate taxes; and if the beneficiary is under the age
of 59 1/2, a 10% penalty will be levied upon the withdrawal from the IRA.
It's a vicious cycle.

This statement is required by IRS regulations (31 CFR Part 10, §10.35):
Circular 230 disclaimer: To ensure compliance with requirements imposed
by the IRS, we inform you that any U.S. federal tax advice contained in
this communication (including any attachments) is not intended or written
to be used, and cannot be used, for the purpose of (i) avoiding penalties
under the Internal Revenue Code or (ii) promoting, marketing or
recommending to another party any transaction or matter addressed herein.

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About The Author
Best IRA Rescue provides services on your IRA investments and traditional
IRA and will help you reduce your inherited and beneficiary independent
retirement account taxes in your estate assets. Roth on ROIDS is your
advanced Roth IRA retirement planning strategy and one of the best IRA
tax-savings strategies with benefits of a guaranteed death benefit,
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policy loans.

Contact us if you have any questions on your IRA retirement planning.

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