Utah Business Law Lawyer & Attorney : Strong and Hanni Law Firm : Business Planning, Formation and Consulting

          If you are 70½ years old and have an IRA retirement account, Congress has given you an unusual charitable contribution opportunity during 2007.   IRA’s are wonderful private retirement plans, but withdrawals after the owner’s death are taxable income to the recipient.   State and federal income tax will be paid at the receiver’s income tax rate and reported on the receiver’s tax return.   Further, if your estate is subject to death taxes, your estate must also pay death taxes on the same IRA money that is subject to income tax.   In many scenarios, those IRA dollars can be taxed at a combined rate approaching 80% of the total IRA balance, to satisfy income and death taxes.

          As a result, if you already have sufficient income and assets for your retirement, you may find that taxable IRA monies present a perplexing problem of double taxation.   One partial solution has been to withdraw and spend those IRA monies during retirement, paying the taxes as you go, rather than using other assets for living expenses. However this approach increases your income tax during retirement years. Another solution has been to give those IRA monies to charity at your death by naming a charity as the beneficiary of the IRA.    The IRS has now provided a third alternative.

Only through December 31, 2007, an IRA owner who is at least 70½ years of age, can direct his or her IRA to cut a check directly to a charity for up to $100,000 and the gift will satisfy the IRA owner’s minimum withdrawal requirements up to $100,000 (which will not be taxable to the owner) and a spouse can make a like distribution from a spousal IRA account with the same results   By so doing, the owner (and spouse) will satisfy the minimum withdrawal requirements for 2007 (without incurring income tax liability) will reduce the total amount of IRA funds exposed to double taxation, can make available up to $200,000 from cash flow for other uses and can help a charity of choice with a significant gift.

Written Scott R. Jenkins

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As many of our clients know, the current estate tax exemption in the United States is $2,000,000 (this $2,000,000 exemption is scheduled to change in future years). This means that if a U.S. citizen dies in 2007 with a gross estate (i.e., roughly your net worth) of less than $2,000,000, then no estate taxes are owed and no estate tax return need even be filed with the IRS. 

The maximum estate tax rate for a person dying in 2007 is 45%. This means that after the $2 million exemption is applied, your taxable estate would be subject to this wealth transfer tax equal to 45% of the value of those assets.

If an estate is larger than $2,000,000, we want our clients to know that it is possible to effectively “zero-out” your estate tax bill. Depending upon the net worth involved, advanced planning techniques necessarily involve some degree of complexity and a higher risk of IRS audit. Advanced estate planning often also involves life insurance in order to replace estate taxes paid. Some of our clients have opted for simplicity at the price of paying more estate taxes. 

We strongly recommend that basic foundational estate planning documents be put into place to ensure that husband and wife each take full advantage of the $2,000,000 estate tax exemption. These foundational documents include separate trusts for husband and wife, separate “pourover” wills for husband and wife, and other collateral documents. Many of our clients with net worth larger than $2,000,000 have executed these important foundational documents. With these documents and appropriate asset titling in place, a married couple can leave up to $4,000,000 to their children free of any U.S. estate tax. 

We have clients with net worth in excess of $4,000,000 who have not yet gone beyond the basic foundational documents in order to “zero out” their future estate tax bill. These additional techniques involve strategies such as the following: ownership of life insurance in an irrevocable life insurance trust or in an LLC owned by the children; forming a family foundation and transferring assets to it; engaging in other charitable giving techniques such as charitable remainder trusts; forming family limited liability companies and gifting away interests in it; combining various types of trusts such as grantor retained annuity trusts, qualified personal residence trusts, etc.

If you have a desire to zero-out your net estate tax bill, we would be happy to sit down with you and explore these additional estate planning strategies.

One important component of almost every estate tax savings plan is to shrink your estate through a regular, annual gift-giving program to your children and other descendants. The annual gift tax exclusion (i.e., the amount you can gift each year to each donee) is $12,000. In addition, each U.S. citizen has a lifetime gift tax exemption of $1,000,000. This is over and above the annual exclusion. Gifting away $1,000,000 worth of assets now is a good way to leverage the shrinking of your taxable estate, since a gift today also carves out of your estate the future appreciation or growth in value on the assets that you gifted away.

If you would like assistance in any of these areas, please feel free to contact any member of the Strong & Hanni Business and Estate Planning Group.

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