Roth IRA As Part of Your Estate Plan
Death & Taxes
The Estate Tax debate rages on in the United States. Temporarily on hold for 2010, the tax will come roaring back in 2011. As Presidential administrations change and Congress turns over, no one knows what the future of estate taxes will be. One thing is for sure: the government needs money and will take it wherever they can get it.
The largest generational cohort in America, the Baby Boomers, controls immense wealth. As a generation, Boomers have prospered, and have inherited their parents’ wealth as well. When Boomers pass away, there will be one of the largest transfers of wealth in the history of America. Does anyone believe that the government is going to let all of this wealth transfer without taking some of it for themselves?
Probate Can Decimate An Estate
When someone dies, probate is initiated. Probate is the process of adding up all of the decedent’s assets, subtracting all his debts, and distributing what’s left to his heirs. Along the way, everyone has their hand in the till; estate lawyers, accountants, auctioneers, appraisers, and heirs. When probated funds are distrusted, there is a hierarchy that the probate judge follows. Guess who’s at the top? You guessed it: the attorneys. The longer it takes to close out an estate, the more it costs the estate in administrative fees.
Marilyn Monroe’s Estate
Marilyn Monroe died in 1962, leaving an estate worth $819,176. It took eighteen years for her estate to clear probate. Taxes and administrative costs totaled $448,750; attorney fees came to about $270,000, leaving $101,000 to be distributed to her heirs. About 88% of Marilyn’s estate was lost in probate.
Roth IRA Passes Untouched to Heir
Many investors know that a Roth IRA rapidly builds tax-free retirement earnings. Many are not aware that a Roth IRA is also effective as an estate planning tool. Boomers who convert a regular IRA to a Roth IRA can accomplish two things:
- reduce their estate taxes
- eliminate the income tax their heirs would have to pay on withdrawals from a regular IRA
The reason that this strategy works so well is that with a Roth IRA you are not forced to make withdrawals as you are with a regular IRA. You are free to keep your funds in the Roth and accumulate as many tax-free dollars for your estate as you are able to.
You Will Have To Pay Taxes at the Time of Conversion
You will be required to pay taxes on the funds that you transfer to the Roth account; after all, you haven’t paid taxes on this money yet. But, this is still a wise estate planning move, because when you pay the conversion tax you are essentially pre-paying the income tax for your heirs without owing any gift tax or using up any of your federal estate tax exemption, and reducing the size of your taxable estate.
Seek Professional Advice
One thing is for sure: estate tax issues will continue to evolve. Wise estate planners will seek the advice of an estate professional so that the information that they act on is current.
