Heirs Don't Get the Money IRAs, 401(k)s, Pensions Can be "Tax Trap" for High Earners

    /24-7PressRelease/ - KEEGO HARBOR, MI, February 17, 2007 - Keith L. Mohn, CLU, CHFC (www.benefitsolutionsgroup.biz) is a nationally known financial planner who focuses on physicians. He and his associates have helped thousands reduce taxes and have more money for retirement. They ask new clients if they plan on leaving anything to children or grandchildren? "Most clients are appalled," says Mohn, "to learn that in spite of 'good' money management, their funds could end up with state and federal tax agencies -- not the family." 'Tax qualified' plans are taxed at 70-90%. Mohn presents a different strategy.

"Step One," says Mohn, "is to learn what an "IRD" is." IRD means "income in respect of a decedent" (deceased person)--income which would have been taxable to the decedent physician, had he/she lived. Whoever receives items of IRD must report as gross income and pay income taxes when received - typically, the year of the death, in addition to federal estate (death) taxes and state estate/inheritance taxes.

As federal taxes reach nearly 40% (even without state income tax), and estate tax is assessed between 37% and 50%, the combined tax rate escalates fast. Although rules provide for a partial income tax credit for estate taxes paid, the total tax on assets characterized as IRD assets can be over 90%.

Assets that qualify for the dreaded IRD treatment are incomes earned by decedent but not yet paid, like bonuses or commissions. Once paid to the estate, they are hit with income and estate taxes. A big IRD asset is the Retirement plan--pensions, 401(k)s, and IRAs (to the extent contributions were originally tax deductible).

How IRD Eats Up Retirement Plans
Single physician "Jim" has assets exceeding current estate tax exemption. He got what he thought was good counsel, but his IRA is fully taxable -funded entirely with tax-deductible contributions. (The same could apply to a married couple, but the estate tax wouldn't be due until the second spouse dies if he/she were the beneficiary, due to the unlimited marital deduction).

Assuming Jim's fully taxable estate of $1,000,000 is held in the IRA, Jim's heirs would first pay $500,000 in estate taxes and then another $248,000+ in federal income taxes (i.e., 40% of the remaining amount after giving a deduction for federal estate taxes paid). Thus, only $250,000 is left from the IRA for beneficiaries. Jim's IRD IRA is taxed up to 75%.

#1. Better. Jim liquidates
If Jim liquidated his IRA today (same as above), fewer taxes would be due. In this new scenario, Jim pays income taxes on the $1,000,000 liquidation himself and his estate pays the estate taxes the next day. With one-day difference, his heirs are better off because there was no IRD -- no one had died yet! This is because the federal tax rules do not allow an income tax credit for state estate taxes paid, only for federal taxes paid.

In scenario #1 the heirs get only an extra $48,000 thanks to early liquidation. But there are better strategies that can save 70% or more of the IRD taxes.

#2. Best. Avoid The Tax Trap
If a large retirement plan balance exists - but it's not needed--there is a way to avoid the tax trap for heirs. "To ensure 70%+ of these funds don't go to state and federal taxes, one must transcend traditional money management," says Mohn. "The earlier the better." This can involve a rollover--creation of a special purpose qualified plan -- and combination of legal and financial disciplines. With planning, the threat of significant IRD can be eliminated from a physician's estate plan.

Keith L. Mohn, CLU, CHFC -- financial consultant, lecturer, and President of Benefits Solutions Group, LLC, a full service financial consulting and planning firm specializing in high net worth individuals, business owners and physicians -- has provided asset management for medical professionals since 1983 and is a member of The Wealth Protection Alliance. Email [email protected] or go to www.benefitsolutionsgroup.biz.


Contact:

Adrienne Lenhoff Wise
248-366-0388
[email protected]

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