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Retirement Products

Estate Tax

Estate planning is critical to preserving wealth for future generations. The estate tax or "death tax" is a federal and or state tax placed on a decedent's asset transfer. A gross estate includes the value of all property in which the decedent had an interest at the time of death including employer-sponsored retirement plans and IRAs. Whether an estate will be subject to estate taxes depends on the year of death, the gross estate's value, the amount of debt, the expense of settling the estate and any available deductions.

In 2019, married couples have a total federal exemption amount of $22,360,000 due to the estate tax being portable. Upon the death of the first spouse, any unused exemption will be transferred to the surviving spouse and added to his or her remaining exemption amount. IRS Form 706 "Estate and Generation-Skipping Transfer Tax Return" must be filed for the deceased spouse. This holds true even if a return would otherwise not be required. 

Please see the table below for federal exemptions and tax rates:

Year

Estate Tax Exemption

Top Tax Rate

2018

$11,180,000

40%

2019

$11,400,000

40%


Owners of a large estate need to be mindful of the Generation Skipping Tax (GST). The GST was introduced to prevent wealthy individuals from bypassing the next generation in terms of what's inherited.

The federal GST applies to wealth transfers greater than $11,400,000 that bypass or skip more than one generation (i.e. grandparents to grandchildren) or to a non-family member who is more than 37.5 years younger than the investor. The GST mimics the federal estate tax in terms of the amount of the tax rate. A significant difference is that the GST is not portable. 

The GST tax is in addition to the estate tax. The GST is assessed when the transfer of assets is made. Moreover GST can occur prior (or after) the death of the transferor. 

Year

Generation Skipping Tax Exemption

Top Tax Rate

2018

$11,180,000

40%

2019

$11,400,000

40%

 

Income in Respect of a Decedent (IRD)

IRAs, like other qualified retirement plans, are classified as property subject to Income in Respect of a Decedent (IRD). An inherited IRA retains the same makeup as it would have if the decedent were alive to receive it. IRAs are potentially subject to a "double-tax," as their value can be included in the estate and counted as income. How? When a taxable IRA is inherited, the beneficiary who subsequently takes distributions pays income tax, just as the IRA owner would have, had he or she lived. The deceased IRA owner would not have also paid the estate tax, since he or she would still have been alive.

The IRS provides a frequently overlooked federal tax break regarding IRD. An IRA beneficiary may offset some of the income charged on the taxable IRA distribution by the amount of estate taxes attributable to the IRA. The IRD is claimed as an itemized miscellaneous deduction, reducing the taxable IRA income by the estate taxes paid on the IRA, up to the amount of IRA income received. When all estate taxes attributable to the IRA are exhausted, the deduction's availability ends. If the individual taking the IRA distribution does not itemize, there is no deduction. The value of a deduction could be lessened if the individual is subject to alternative minimum tax or otherwise restricted. The deduction is not available for state estate tax.

This estate tax discussion is based on federal law at the time of this writing and is subject to change. It is not intended to be tax or legal advice. Anyone designing an estate plan should review this serious matter with their tax or legal advisors before proceeding.

Please consult a retirement specialist at 888-522-2388 for additional information.

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