If I die with $100k in my IRA, obviously the $100k is part of my estate. As income taxes have not been paid, are they paid by my estate? If so, is the payment made before the asset's value is computed for estate taxe purposes?
If your estate is large enough, they would be included in your taxable estate tax.
For income tax purposes their distributions are taxable to the beneifciaries.
If the estate is your IRA's beneficiary and it withdraws the funds, the estate will pay the income taxes. More usually the beneficiaries would pay the tax as they withdrew the funds from the IRAs they inherit. The estate tax is calculated before any distributions. Yes, that's double taxation but no different than had the deceased taken the distributions, paid the tax and left the cash in his estate, but a smaller estate by the amount of the taxes paid by the deceased. ed
If there are named beneficiaries, the money goes straight to them (with a number of options on how they want it, such as an immediate lump sum payment or distributions over some period of time). They pay any taxes due at their tax rate in the year of distribution, often through withholding.
-Mark Bole
Agreed. Yes. No.
First, the estate tax doesn't begin until you have $2M (in
2007) at your death. It goes to $3.5M in 2009, is repealed (i.e. no tax) in 2010, and back to a $1M limit in 2011. If you die in 2011 with, say, $2M in IRAs and no spouse to pick up the extra mil, your estate will have to liquidate enough IRA money to pay the tax due, about $345K, if I read the charts correctly. The estate would have to liquidate more than that to pay the regular income tax due as well. It should be clear that it's quite the tax burden to die with huge, regular IRAs. If one has a spouse, they could leave the first million to the other heirs directly, or through a trust, and leave the balance to the spouse. If no spouse, an aggressive program of converting to Roth IRAs would be the best move if one's goal is to reduce their estate's overall tax burden. The $2M, once converted, would place nearly $1.3M in Roths, and the estate tax would be ~$100K or so. So $1.2M to the heirs with no further taxes ever due. JOE
The FMV of the IRA on the date of death is included in your gross estate. Income tax is paid by the beneficiary when withdrawn, or by the estate if there is no named beneficiary. It can get complicated, so you should consult Pub 590, with your particular set of facts, for a more definitive answer. If there is a taxable estate, the estate taxes paid may result in a deduction for the eventual beneficiary.
That's $435K by my calculation.
You could even leave one million in trust for the spouse in a Q-Tip trust, so that she has the power to manage it, get the income and, if needed, principal. But it's still not treated as belonging to her when she dies, so it escapes the "marital penalty" in the estate tax. Stu
I saw multiple references to; "For amounts over $1,000,000 but not over $1,250,000, the tentative tax is $345,800 plus 41% of the excess over $1,000,000." So I thought this was the latest. Are you grossing that up as any money coming out of the IRA has income tax due as well? JOE
You're right, but your calculation is wrong. What you did was take $2,000,000 and subtract the $1,000,000 exemption amount and then calculate the taxes on that million. But that's not how it's done. First you have to calculate taxes on $2,000,000, which is $780,800. Then you subtract the tax on $1,000,000, which is $345,800. The result is the tax, $435,000. Stu
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