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IRA & Pension Planning
Estate Planning Tips for Beneficiary Designation
Bypass Trust Funding: If the participant’s
IRA/Plan has grown in value to the extent that it is equal to or larger than
the value of the family home, the participant and his or her spouse
may need to institute special planning to be able to fully fund the Bypass
Trust upon the death of the participant.
Typically, the surviving spouse
will be named as the designated beneficiary of the IRA or Plan. This may or
may not be a good idea, as shown in the illustration at right, wherein
the Credit Shelter (Bypass Trust) will be under-funded if the surviving (non participant) spouse
is named as the designated beneficiary of the IRA.
Example:
A husband and wife have a Community Property (CP) estate worth $4
million (the estate is made up of the following: the husband has an IRA
worth $1.2 million and other CP Trust assets (stock, cash, house) worth
$1.4 million. The wife has no IRA but other CP worth
$1.4 million. The combined assets equal $4 million). The husband dies and
the wife, as designated beneficiary, rolls her husband’s IRA into her
name. Now the executor of the decedent’s estate has only $1.4 million (the
CP amount) to fund the Credit Shelter Trust or Bypass Trust (not the
full $2,000,000 Exemption Credit allowed by the IRS that could have been
allocated to the Bypass Trust). The surviving spouse now has $1.3
million in her estate and $1.4 million in the Bypass Trust.
If
the surviving spouse dies the following year, only her Credit/Exemption
Equivalent (currently = $2 million) and the $1.4 million allocated to the
Credit Shelter (Bypass) Trust would be exempt from estate taxes. Now
$600,000 is exposed to death taxes (45% * $600,000). This would result in an estate tax of over $300,000!
With proper planning, the
Bypass Trust could have been fully funded with the couple's other
community property assets by effectively using each spouse’s unified
credit of $2 million. The Bypass Trust would then have been funded with
the husband’s $2 million on his death. If the surviving spouse should
die the following year, without any additional planning, there would be
'0' estate tax. |
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