ISSUE #34

One of the most difficult items to deal with in estate planning is being sure that your ideas, thoughts and wishes are carried out. To that end, it is becoming increasingly popular with the planning community to have each person leave instructions, either within the will or trust document itself or as an addendum. Below is what we believe and an excellent example of what one might consider when dealing with one of his or her retirement assets. Because of its length, we are presenting the letter in two parts.

 Part I

You Have Inherited My Traditional IRA

As you children may have learned by now, you have inherited my Traditional IRA in equal shares. 

The IRA you have inherited is a perfectly legal tax shelter that can be kept going for many years to come. 

First, I am going to tell you the golden rule of maximizing the value of your inherited IRA and how you are required to take it out.

Then I am going to tell you what you must do now.

The Golden Rule:

The golden rule of maximizing the value of your inherited IRA is:

Every year, take out only what you are required to, and no more.

Here's why:

You produce the greatest possible tax-sheltered earnings and growth on the IRA by leaving the most money inside of your inherited IRA for the longest time possible. Leaving as much money as possible inside of the IRA is therefore the only course of action likely to produce the greatest value to you. 

If you invest wisely and leave your investments in the IRA long enough, you might even out-earn the taxes you would have to pay by withdrawing the entire IRA now.

On the other hand, each dollar you withdraw will cost you income taxes.  The more you take out, the higher the income taxes you will pay at rates that increase as your taxable income rises.   

So, when you make an IRA withdrawal that you don't have to, you voluntarily end your tax-sheltered investing opportunities too soon and you pay more income taxes than you otherwise were going to have to pay.  That enriches Uncle Sam -  at your expense.  And every dollar taken out of your inherited IRA can never be put back in  -  even if taken out by mistake.

What You Are Required to Take Out:

Tax laws impose annual "required minimum distributions."  IRA owners generally must take them during their lifetime, and you must take them after you inherit the IRA. 

Required minimum distributions are determined by dividing the account balance by a life expectancy. 

A hefty federal tax penalty applies to failures to withdraw required minimum distributions – 50 percent of the amount that should have been withdrawn.  That penalty applies -  in addition to applicable income taxes!

It might be that I had not yet taken the distribution required during the year of my death.  In that case, you must take that distribution by December 31 of the year of my death and pay any income taxes due on that distribution.

Starting with the year after my death, distributions are based on your life expectancy, but only if you divide up the account on time and set up an inherited IRA for each of you. 

On the other hand, if you fail to divide up the account by December 31 of the year AFTER my death then all of you must use the shortest (oldest child's) life expectancy.

The rules that permit division of the account by December 31 of the year AFTER the IRA owner's death are provided in the income tax regulations. 

If anyone questions this, have them look up Income Tax Regulation Section 1.401(a)(9)-7, Question & Answer 2(b).

To be continued in the next issue. Used with permission.

Michael J. Jones of the CPA firm of Thompson Jones LLP in Monterey, California,is a consultant in the areas of wealth transfer strategy, trust and probate matters, and family business transitions. He is the author of The Pension Answer Book: Special Supplement on the Final Regulations Governing Minimum Required Distributions (Panel Publishers).  Mike serves on the Editorial Advisory Board of Trusts and Estates as Chair, Retirement Benefits Committee.

You may wish to access NEW information this month at: www.ashland.edu/estate and “click” on “Planned Giving” in the left hand column.

Our planned giving director, Paul Ditlevson, can be of tremendous service in helping you integrate your giving goals with your overall estate plan. He can also help you prepare to visit your attorney. You can reach Mr. Ditlevson by calling 419-289-5090 or by email to pditlevs@ashland.edu or regular mail at 401 College Avenue, Ashland, OH 44805.