Dedon on Estate Planning

Estate Planning and IRA Beneficiaries

The advantages for individuals who choose to do a Roth IRA conversion in 2010 have been widely publicized. (E.g., see the March 10 Post, or Google "Roth IRA conversions.")  Whether an individual does a Roth IRA conversion or simply has existing IRA's, the dilemma is how to integrate the IRA beneficiary designation with the estate planning objectives.  If you desire to name the surviving spouse or the children directly as beneficiaries, it is as simple as filling out the beneficiary form.  But it is not always that simple. Consider these examples:

1. John and Mary are on their second marriage.  John has two children from his first marriage and Mary has one child from her first marriage.  John wants to name Mary as his IRA beneficiary but he is concerned that Mary will then leave the IRA to her only child.

2. Bill and Nancy have been married 34 years and have four children.  Bill wants to name Nancy as his beneficiary.  If Nancy is the beneficiary, can the IRA upon Nancy's death "stretch" over each of their four children’s lifetimes, thereby saving significant income tax?

3. Ann is leaving her IRA to her two children upon her death.  However, one child is an obstetrician specializing in high risk pregnancies who works too many hours which is taking a toll on her marriage.  The second child is becoming an accomplished surfer in Manhattan Beach, but accomplishing little else.  Can Ann achieve the benefits of a "stretch IRA" but yet protect the IRA proceeds from a child’s lawsuit, divorce or frivolous spending?

There are solutions to these issues to be discussed in future Posts.  Typically, carefully drafted Trusts are involved.

Spring Fever – But Estate Tax Relief Hope Does Not Spring Eternal

So with baseball season starting this week many are focused on whether the Yankees repeat?  Here in Washington politicians are wondering whether this is the year the Nationals become competitive. Congress must be thinking about baseball because members don’t seem intent on solving the estate tax mess.

What is the latest?  According to the Association for Advanced Life Underwriting (AALU), as of April 1, there are not enough votes in the Senate to pass a "permanent" estate tax bill.  The Senate is the roadblock, with both the House and the Obama Administration agreeing that the exemption amount should revert to the 2009 law, when individuals could protect $3.5 million ($7 million for married couples who plan properly).  Although there is no estate tax in 2010 (assuming Congress does not retroactively reinstate the estate tax), the exemption amount drops automatically to $1 million in 2011.

Could we again be limited to a $1 million exemption amount?  What seemed improbable in 2009 is becoming more likely as the months pass.  It does not bode well for taxpayers, particularly considering an article in the March 29, Daily Tax Report, which began:  "The legislative picture in coming months is likely to be dominated by the need for revenue, as the budget deficit worsens and Congress seeks more funding to pay for ..."