Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

The federal estate tax.rtf


Published on

Published in: Economy & Finance, Business
  • Be the first to comment

  • Be the first to like this

The federal estate tax.rtf

  1. 1. definition :A complete asset or investment disposal such as outright sale or liquidation.----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- FEDERAL ESTATE TAX has been repealed for 2010, but whether the tax will return willdepend on Congress. More up-to-date information is available on the blog for this website.Until Congress takes action, no one knows what will happen to the estate tax. The followinginformation may be useful if the tax is imposed again in 2011:THE FEDERAL ESTATE TAX is a tax on any transfer of assets from a deceased persons estateto his or her heirs, except for transfers to spouses. Under current law, the federal estate tax willbe repealed as of January 1, 2010, but only for one year.ALL OF THE ASSETS owned by the deceased person are subject to the estate tax, includingproperty in joint tenancy, living trusts, IRAs, and life insurance (if the insurance was owned orcontrolled by the decedent).EACH ESTATE HAS AN EXCLUSION from the tax that will increase each year until 2009, whenit will be $3,500,000. The exclusion amounts are as follows:Year of Death Exemption2002 $1,000,0002003 $1,000,0002004 $1,500,0002005 $1,500,0002006 $2,000,0002007 $2,000,0002008 $2,000,0002009 $3,500,0002010 Repealed2011 $1,000,000The maximum rates for the federal estate tax are as follows:Year of Death Maximum Tax Rate2001 55 %2002 50 %2003 49 %2004 48 %2005 47 %2006 46 %2007 45 %2008 45 %2009 45 %2010 0%2011 55%
  2. 2. ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- If I have a living trust, will my family avoid paying estate taxes?A. This is one of the biggest misconceptions that people have with respect to living trusts andestate planning. A properly funded living trust avoids probate when you pass away. However,probate and the federal estate tax have nothing to do with one another. In order to save federalestate taxes, your lawyer must incorporate estate tax planning provisions into your living trust;and, generally, a living trust can only reduce (not in all cases eliminate) estate taxes and only ifyoure married.Q. How can I obtain help with funding my living trust?A. There are several resources you may want to consider when funding your living trust. Thefirst is the attorney who drafts your estate planning documents. Usually, he or she will need to filethe deed of your trust for any real estate that is being placed in your trust and may fund your non-real estate assets for you or give you letters or instructions that will help you transfer thoseassets. However, your CPA, CFP, or financial advisor can also help with retitling non-real estateassets or with completing forms to name your trust as beneficiary. Examples of such assets arebank accounts, investment accounts, and IRAs. Considering how important it is to have yourassets properly titled once your revocable living trust has been created, it may be wise to seekthe assistance of all your advisors in funding your trust.-----------------------------------------------------------------------------------------------------------------------------------------------------------------“How to Save Your IRA from Destruction”Posted on January 1st, 2009 James 2 commentsIf you have an IRA and you’re concerned about how to pass it on to your loved ones, anapproach of naming a trust as the designated beneficiary has several benefits over directlynaming the beneficiaries. The issues that can affect the named beneficiary to name a few arethey could be a minor, they might not be careful with money, or they may have marital or creditorissues, and could be disabled to the extent the inheritance would affect their governmentalbenefits. Next, if the beneficiary dies before distribution, the alternate beneficiaries may not beaccurate. Another condition we often see is the beneficiary may purposely or accidentallywithdraw monies from the IRA causing adverse tax consequences. Additionally naming theclient’s revocable living trust as the beneficiary, even with the appropriate language that extendspayout called “conduit provisions” may create issues with the age of beneficiaries in order to“stretch-out” the required minimum distributions.However, in 2005, the IRS issued Private Letter Ruling 200537044 (the “PLR”) that approved anew type of revocable trust created solely to be the beneficiary of an IRA account. As a result ofthis PLR, it is now possible for you to create an individual trust known as an IRA BeneficiaryTrust® which provides maximum protection and flexibility for your retirement investments.
  3. 3. This IRA Beneficiary Trust® insures that your beneficiaries will extend (“stretch-out”) their taxableMinimum Required Distributions (MRDs) on the IRA over a much longer period of time. By usingthis trust, the age of each beneficiary becomes the effective age for that beneficiary’s requiredminimum distribution. As an effect, the IRAs can continue to compound for many years free ofincome-tax and may literally grow to be worth millions of dollars! This type of trust goes by manynames and has also been called an IRA trust, an IRA Inheritance Trust, a standalone IRA trust,an IRA stretch trust or an IRA protection trust.When your loved one/s inherit your IRA fund andthey keep the funds in the IRA over their lives and only take the minimum required distributionseach year (the “stretch-out”), the amount of money that can accumulate and be paid to themshould be massive in comparison to taking the monies directly and facing the immediate tax onthem. For example, assume you have a $150,000 IRA account; we will also further assume youhave two different ages (10 and 25) for your beneficiaries and presume that the account averagesan annualized 7% return. First, for the beneficiary who is age 35[i] and inherits IRA proceedsupon your departure, the total benefit is $1,212,165 of after-tax benefit as opposed to $663,496for taking the proceeds directly without the stretch-out. For the 10 year old beneficiary,[ii] they willreceive approximately $4,589,236 after-tax benefit as opposed to $2,641,198 which is what theywould receive lacking the stretch-out because of the immediate taxes due when they receive yourfunds directly.Therefore, you can see that this wealth amassing strategy only works if the beneficiaries hold theinherited funds inside the IRA account. If a beneficiary takes all of the funds out of the IRAaccount (referred to as a “blow-out” because it blows the stretch-out), this wealth accumulationtechnique is lost. One great reason to create an IRA Beneficiary Trust® is to preserve the stretch-out and prevent a blow-out. Unfortunately, we see this blow-out too often and it jeopardizeswealth that must be saved. Many times your beneficiaries will not be aware of the tax rules andtheir distribution choices, so they’ll withdraw from the IRA funds at the first opportunity or do aforbidden rollover. Even if you hope that your children or beneficiaries will do the right thing bykeeping the funds in the IRA account for their lives to “stretch-out” payments, they may expose itto numerous threats and hope is not a planning strategy as I’ve indicated in my book “The 3Secret Pillars of Wealth.”Some of the threats come in the form of a divorce where your beneficiary’s spouse could seekhalf of the inherited IRA if they live in a community property state. The divorce rate is out ofcontrol and a huge numbers of inherited money has become a target for the ex-spouse. Eventhough inherited property is considered separate property it may become the only thing availableand because divorces can be very costly and last for years, your beneficiary may succumb to thepressures of long and nasty divorce litigation and be willing to surrender a large portion of the IRAaccount just to settle the divorce.If you have a reasonable IRA you want to pass down or don’t think you’ll need to live on your IRAyou absolutely should be thinking about this strategy.--------------------------------------------------------------------------------------------------------------------------------------------------------------------
  4. 4. Hidden Dangers in IRAsIs there a Ponzi scheme lurking in your IRA?That may sound like a bizarre question. But in recent years, a number of well-off professionalsand their families have been ensnared in frauds that prey on individual retirement accounts,according to securities lawyers and firms that manage these accounts.[FAMILY] Mark MatchoThe vehicle typically targeted by such schemes is a self-directed IRA—a type of retirementaccount that enables the owner to pursue a variety of investments outside the scope of stocks,bonds and mutual funds. Self-directed IRAs are often used to hold hard assets like land, andalternative investments such as hedge funds and so-called private placements. (Privateplacements are securities sold without a public offering, typically to a small group of investors.)Essentially, you are allowed to invest in anything except life insurance or collectibles.Self-directed IRAs, which make up a minuscule share of the overall IRA market, are perfectlylegitimate vehicles, and the rules governing them are basically the same as for traditional IRAs.But few large investment companies or banks will set up such accounts because of theircomplexity. Instead, youll need to find one of the custodial or administrative firms that specializein handling self-directed IRAs, such as Entrust Group in Reno, Nev., which says it blocksinvestments that it knows are under investigation by securities regulators.Costs typically include an annual custodial fee and transaction fees, ranging from $50 to a fewthousand dollars a year, depending on assets and activity. Some lawyers, accountants andconsultants will set up and maintain self-directed IRAs as well, often charging higher fees. Somebank trust departments, particularly those at community banks, also handle the accounts.Yet self-directed IRAs can be much trickier to handle than plain-vanilla retirement accounts,accountants and tax lawyers say. One of the most-common traps is "self dealing." Investors arentsupposed to benefit from the investment before they start making withdrawals in retirement. Thatmeans any profits they make from an IRA investment must go to the IRA and not another account—a stipulation that often trips people up and could disqualify the entire IRA. Also, if you use anIRA asset to buy an asset you currently use, such as a vacation home or a condo for a child incollege, it could be a tax-law violation.Given that self-directed IRAs can hold almost any type of asset, they can also make it easier forordinary investors to get burned. Faye Albert, a 67-year-old actuary in Miami, says she movedtwo IRAs and a pension account to self-directed IRAs at a Connecticut bank at the urging of acolleague and fellow actuary. Ms. Albert says the actuary pooled Ms. Alberts savings—whicheventually totaled some $1 million—with other assets to invest in what proved to be the Ponzischeme run by Bernard Madoff.Ms. Albert says that she thought the bank, Connecticut Community Bank in Westport, Conn., washolding her Madoff-invested assets in her account since it was charging her custodial fees. Shelearned in late 2008 that it wasnt. "I thought my money was doing well, so I wasnt really followingthe details," she says.Ms. Albert filed a lawsuit last November against the bank in U.S. District Court in New Haven,Conn., accusing it of negligence, breaching its fiduciary duty, and aiding and abetting fraud,among other allegations. The bank has denied the allegations in a court filing, and its attorneydeclined to comment further. In April, Connecticuts attorney general filed a suit against the bank,
  5. 5. saying it had "aided and abetted" Mr. Madoffs Ponzi scheme and failed to verify Mr. Madoffsinvestments. The bank denies the allegations and says it will "vigorously defend the lawsuit."In cases of fraud that start with self-directed IRAs, there are typically no real investments backingthe private placement, so the scheme eventually falls apart, says Pat Huddleston, a formerSecurities and Exchange Commission attorney in Atlanta who serves as a court-appointedreceiver in such cases.Hugh Bromma, chief executive of Entrust Group, says this happened recently to his own 78-year-old mother-in-law. She recently lost $40,000 in an IRA investment that turned out to be a Ponzischeme. She thought she had placed the money in a certificate of deposit, but the paperworkturned out to be "a copy of a certificate you could buy at the drugstore," Mr. Bromma says. "It saidit was an FDIC-insured deposit at NationsBank, which hasnt existed for years, of course." Thefraud came to light only after the alleged perpetrator died in January.He recommends that investors concentrate on learning about the underlying investment, ratherthan focusing on the promised return. "Find out if its a security or not, and if not, why not," Mr.Bromma says. "Find out what youre actually investing in. Can I touch it? Is there a physicaladdress? Where can I find out more about it?"After learning of the fraud, he says he has tried, with limited success, to analyze his mother-in-laws other investments. "Its like pulling teeth," Mr. Bromma says. "She says she trusted this guyfor 20 years with her assets and doesnt want her children knowing her business." He says shebought an annuity through the same adviser—but instead of paying interest only, as she thought,it is returning interest and principal each year, which means it will be worthless at the end of itsterm.Mr. Huddleston, who has started a sideline business that performs background checks oninvestment advisers, recommends starting the conversation about investments with your parentsby asking them if they would tell you if they thought someone was trying to take advantage ofyou."Of course theyll say yes," he says, "because they dont want you to get hurt. So then you cansay you appreciate that, and it gives you a chance to ask if you can do the same for them."—Email: an IRA Custodian or Administrator for Self-Directed IRAsPosted by Entrust California on Wed, Oct 28, 2009The ability to make your own investment choices from a broad range of investment types is whymost people choose to establish a self-directed IRA. But investors should also extend thisfreedom to choose investments to selecting an administrator who meets their expectations ofsafety, credibility, competence, and customer service. When choosing a custodian oradministrator for your IRA, like choosing an investment, there’s some criteria to consider.First, here is some background information. An IRA custodian must be a bank, credit union, trustcompany, savings and loan, or an entity that is licensed and regulated by the IRS as a “non-bankcustodian.” The assets are always held by a bank. Banks who offer self-directed IRAs oftencontract out the administration, recordkeeping, and other services to third parties, often known asthird-party administrators, but the custodian of the IRA never relinquishes custodial control overthe IRA and the assets in it. Banks often vest the assets of IRAs in a nominee name for the
  6. 6. benefit of your IRA. Banks have hired third parties to provide such functions for decades, even forIRAs that are not self-directed. (The relationship between the IRA customer, custodian, and third-party administrator is described in IRS form 5305.)Depository banks are always regulated and supervised by state and national regulatory bodies.Banks that hire outside administrators are required to ensure that the administrators adopt thepolicies and procedures approved by the custodian. The administrator must also perform itsobligations to the custodian to the same or better standard as the custodial bank. Theadministrator is often required to have an independent third party verify all transactions. Cashtransactions are often only permitted by the independent third party, providing a level of controland oversight not found in many banks.When choosing an IRA custodian or administrator for your hard-earned dollars, here are somethings to consider: 1. Make sure that you receive the custodial document, form 5305, from your administrator. Donot open an account without this document. 2. Read form 5305 to confirm that a relationship exists between the custodian and the nomineeor administrator. You might want to call the custodian to determine that the custodian has arelationship with the administrator named. 3. Make sure that the undirected funds in your IRA are FDIC-insured. If the IRA has more than$250,000 in cash, find out if the custodian and administrator have programs for pass-throughinsurance from other banks to protect cash in excess of the bank limit. FDIC insurance is backedby the U.S. government. Brokerage firms use SIPC insurance, which is not backed by the U.S.government, so there might be risk associated with cash deposits at brokerage firms. 4. Visit your administrator or custodian. Make sure that they have a physical address. If thecustodian operates in a different state from the one it is chartered in, make sure that the stateregulatory authorities permit operations from a different state. A simple phone call to theregulators should suffice. 5. Find out how much insurance the administrator and custodian maintain for any eventualityinvolving your account and the limits of coverage, for example, for errors and omissions. 6. Determine how long the custodian or administrator has been in business involving self-directed IRAs. Although time is not always an indicator of quality, those who have been inbusiness for a long time have done things properly because they have subjected to regulatoryscrutiny. 7. Information provided by a self-directed IRA administrator in print or on a website must alwaysassure you that they sell no product or, if they do, it must be fully disclosed in their materials.Stock brokers might offer self-directed IRAs and also sell securities or insurance products. If ancustodian or administrator provides you with literature from an investment provider along withtheir IRA package, beware. True, impartial self-directed IRA custodians and administratorscannot provide products, such as LLCs, real estate, notes, or securities, in any form. 8.
  7. 7. Determine if the custodian or administrator provides regular education through the Internet orits offices. The education must be education only and not for selling investments. 9. If there are offers that seem to permit you to use your IRA for purposes other than retirementor appear to be to good to be true, check them out and evaluate them using an independent legalor accounting advisor. 10. Establish service levels for your account. Do the people responsible for handling your accountknow the subject matter? Does the office handling your account understand local customs fortransactions? 11. Is the reporting for your transactions in a form that is effective for you, such as online, in realtime, paper-based, 24/7 access, and so on 12. Are fees understandable and fully disclosed? 13. Watch out for providers that make efforts to disparage their competitors. In fact, many stateshave laws barring the entities that they regulate from espousing negative comments aboutanother custodian or administrator. Rather than rely on the negative information, do your ownindependent analysis and due diligence.By Hugh Bromma, CEO of The Entrust Group-------------------------------------------------------------------------------------------------------------------------------------------------------------------- to save your IRABy KententRecession * Money Features This link offers advice for how to handle your IRA in times of a recession, so that youdo not reach retirement and have no money waiting for you to retire wit * Portfolio Recession This is a great link for learning about how you can make your portfolio recession proof,including your retirement investments, such as your IRA. It offers information for how to save yourIRA.During a recession, many peoples investmentsgo down the drain. If you are saving for retirement with investments, such as an IRA, a recessioncan be really unsettling. It can be worrisome that you will lose your retirement savings, and be leftwith little or no money to retire with. This fear often leads people to divesting their accounts early,and taking the penalties over the potential losses they may face as the markets go down. It is truethat during a recession your IRA may be at some sort of risk, but there are things you can do tosave your IRA. The following are some great tips for keeping your IRA safe and secure duringpoor economic times.
  8. 8. One of the ideal ways to save your IRA, or to protect it from the effects of a recession is todiversify the way your IRA money is invested. Generally during a recession, certain sectors of themarket will decline more than others, and so to ensure that no matter what the situation, yourportfolio does not decline too much, diversify. Of course, this may not protect your moneyenough. So, consider investments that are FDIC insured, such as long term investing in CDs orbanks. Of course this is not the way to save your IRA, but save money for retirement. Lets look atways to better protect your IRA.IRAs are one of the most popular ways to save money for retirement, and there are manydifferent options for how you save with an IRA. For those who have their IRA invested in stocksand securities, a recession can mean loss. When the markets start to decline, people getnervous, and they divest their accounts, which means loss. Unless you are retiring right away, thebest thing you can do to save your IRA is to continue contributing to it, and do not empty it. Inmany cases, you can benefit from a recession when it comes to your retirement plans because ifyou leave your money in, and keep contributing, you can buy more for less. This means that oneof the worst things you could possibly do is take the money out of your account.Because most IRAs have an option to let you choose how you will invest the money that is in it,you can choose ways to invest that are less susceptible to economy changes. Some peoplechoose to invest their money in high risk international companies or high risk stocks so that theycan see their money grow faster and in larger amounts. Others may choose a more conservativereport, such as a money market IRA, or IRAs used to buy bonds. These more conservativeapproaches are better during a recession, and mean less chance of loss, but inSurviving a Recession * Protect Your 401(k) in Turbulent Times This is a great article from an investor that offers tips for protecting your IRA and 401k thebiggest advice is that even during a recession you should not stop contributing to your IRA. * Protect your Portfolio Recession in 2008 This is a great article for how you can protect your investments, including the money in yourIRA during a recession. It does not focus on growth, rather just on protecting the money you havealready invested. * 9 Tips on Surviving a Financial Meltdown This is a great article for how to survive the recession, and help your investment accountssurvive it as well, including accounts like your IRA and other savings plans.To save your IRA during a recession, consider changing the way that your funds are beinginvested. You may want to convert your stocks and securities into bondsor money market accounts. This is a wise option because you can make your investment safer,but also avoid the taxes, penalties, and fees that come from pulling money out of your IRA beforeyou retire.If the economy is in a recession and you have several years until retirement, then you can investin stocks, and other less secure investments, and then just let the economy get back on track.However, you wont be able to do this if you dont have a high tolerance level. If you are worried,dont look at what is going on, when your statement comes, just file it away. That way you will notpanic and sell while things are low. Too many people get nervous, and then they lose moneybecause they make rash, emotional based decisions.If you are retiring soon, and you want to save your IRA from recession, then be sure to investconservatively. If you do not have the time to ride out a poor economic time, then you shouldmake your IRA as bulletproof as possible, even if it means not as high of a return. The risk islower, as is the return, but at least you will have money to retire with. So, make sure you have aclear idea of when you will be wanting to retire so you can determine how conservative you needto be with your IRA.
  9. 9. Generally after a recession, there is economic growth. You can save your IRA by planning for thetime of economic growth and getting yourself in a good position to take advantage of it. Thismeans that while things are cheap, buy them up. As long as you do not pull your money out ifthings continue to go south, you probably wont lose any money, but gain a lot.So, if you want to save your IRA, make sure you have funds to invest in it during a recession. Thebest way to do that is to eliminate your debts so that you free up money, and learn how to stretchyour dollar further. You will want to look for ways to cut back your expenses, whether it isentertainment, housing, or something else. You can drive less, shower for shorter periods of time,refinance your mortgage loansto get lower interest rates, cancel unnecessary subscriptions and services, and learn how to savefor a rainy day. By practicing wise financial habits in all areas of your life, you will have more lucksaving your IRA. This is because you will have money to bolster it while times are tough.There are things that should not be done if you are trying to save your IRA, they are as follows:Saving you IRA * Retirement Accounts This is a great article about how you should not keep your money under your mattress duringa recession, but how investing it is still going to be a good idea, especially in retirement accounts. * How to Protect Yourself if the Economy Sours This article is written for those in fear of recession. It offers tips for making wise financialmanagement decisions, including IRAs during a recession so that your finances stay stable.1. Do not try to outthink the markets. During a recession especially it is difficult to know what themarkets will do, and so trying to time the markets in order to make more from your IRA funds is apoor strategy. Instead, just leave your money alone and be consistent. By consistently adding toyour IRA you will find that you will be buying when prices are high, and when they are low, whichmeans you will pay an average amount. When prices are low, if you have extra to invest, do so,but dont stop investing.2. Do not try to and move your money around quickly from place to place, it is just going to be alot of work, and if you do read the market wrong, you may end up losing more than you gain. Inaddition to the likelihood of you knowing the market being poor, you will end up losing money andtime with transaction fees, commission, and penalties. So, avoid this, and your IRA will be inbetter shape. People have been trying to read the markets and get ahead of the game for years.On occasion they are lucky, but usually it just leads to hassle and frustration.3. Dont divest your accounts. Pulling your money out of an IRA early usually means highpenalties and loss. If your retirement account is taking a loss, ride it out and stick to your originalretirement investment plan. You will only be able to save your IRA if you do not change yourinvestment strategies frequently. Instead, assess your tolerance levels and make investmentdecisions, especially IRA investing, based on your tolerance levels, whether that means you cantake risks and invest in stocks, or need something more secure, so you stick to mutual funds, andbonds. Also, if you pull your money out, or quit contributing to your retirement accounts, youremployer will too, so take advantage of your work plans and even if things are going down, keepinvesting.4. Never invest money that you need. While it is a smart idea to continue investing during arecession, and while it usually will help save your IRA, it would not be wise to put your home, orfinancial well-being in jeopardy to continue investing. You should only be investing "extra" money,or in other words, money you can live without. This way if the money is lost, you wont be in asbad of trouble.In summary, if you want to save your IRA during tough economic times, or during a recession,then be sure to make wise financial decisions so that you do not have to pull money out. Inaddition to that, consider vesting your funds into more secure, less susceptible investmentoptions. Last but not least, if you do not have a high tolerance level for risk, or cant manage
  10. 10. watching your retirement investments decline, then ignore the market until you have to look at it,or until the economy bounces back.------------------------------------------------------------------------------------------------------------------------------------------------------------------ are a lot of good reasons to combine your IRA and living revocable trust, but the processcan be complicated so its important to work with an attorney or other estate planning professionalto make it is done general, a living revocable trust is a good way to avoid probate and its attendant delays andcosts. It also is a good way to provide for family members when you do not want them to receiveinheritances in a lump sum, but rather have the money managed for them professionally anddistributed as you determine when you set up the trust. You also can provide for the trustee tohave tremendous discretion in the making of distributions to the beneficiaries of the trust. A livingrevocable trust is quite flexible and can readily be adapted to your own familys particular needsand situation. In addition, because it is revocable, you can change it throughout your lifetime.The most effective way to combine an IRA and a revocable trust is to designate the trust as thebeneficiary of the IRA at your death. The rules for doing this are quite precise, but an experiencedestate planning lawyer will be able to do this for you. Inherited IRAs provide a great opportunityfor the continuance of income tax deferral or, in the case of a Roth IRA, the continuance of tax-free growth over the lifetime of the person inheriting the IRA. One thing to keep in mind: in orderto maximize the tax savings, if more than one person will inherit the IRA, you should set up anindividual trust for each beneficiary.----------------------------------------------------------------------------------------------------------------------------------------------------------------------- Estate Tax Update 2002-2010The Economic Growth and Tax Relief Reconciliation Act of 2001 includes the repeal of federalestate taxes for people dying after December 31, 2009. Between January 1, 2002 and December31, 2009, the current federal estate tax will gradually decrease as shown in the following table.Year Highest Estate andGift Tax Rate Amount Exemptfrom Estate Tax2002 50% $1 million2003 49% $1 million2004 48% $1.5 million2005 47% $1.5 million2006 46% $2 million2007 45% $2 million2008 45% $2 million2009 45% $3.5 million2010 Top Individual Rate(for gift tax only) Unlimited - Taxes RepealedIts very important to be aware that this repeal is temporary; the entire law "sunsets" (expires)after December 31, 2010. This means that the provisions of this 2001 Tax Act will no longer beeffective on January 1, 2011 and the tax structure as it existed in 2001 will take effect again (in2011, Federal estate tax will be assessed on property in excess of $1 million with a maximum taxrate of 55%.)
  11. 11. Federal Gift TaxCongress did NOT repeal the federal gift tax, although it raised the lifetime gift tax exemption (theamount that may be passed without gift tax) to $1 million, effective in 2002. This means that aperson could make a total of $1 million of gifts over his/her lifetime before owing any federal gifttax. Gifts of more than $1 million WILL be taxed, regardless of the exemption for transfers atdeath. Beginning in 2010, the gift tax rate will equal the highest individual income tax rate(currently scheduled to be 35% in 2010).Basis of Inherited Property"Step-up in basis" will continue until December 31, 2009. The "basis" of a piece of property isgenerally the purchase price of that property and is used to calculate taxable gain when propertyis sold. The greater the increase in value of property, the greater the taxable gain when sold. A"step-up in basis" means that the basis of inherited property increases to the value of the propertyon the date of death.For the year 2010, "step-up" will be replaced by "carry-over basis" rules. Carry-over basisgenerally means the basis of inherited property remains the same as it was for the deceasedowner; which potentially increases the amount of gain (and tax) when the property is sold. Whenproperty is inherited, the heir can choose to take a "step-up" in basis for only $1.3 million of theproperty. For any amount inherited over $1.3 million, the heirs basis will be the smaller of thedeceased owners basis or the date-of-death-market value. The basis of property passing to asurviving spouse can be increased by an additional $3 million.Basis of property given to the decedent by someone other than his/her spouse within 3 years ofdeath cannot be increased.Remember, in 2011, step-up in basis generally resumes as it existed prior to this Act, because allprovisions of this tax act expire after December 31, 2010.------------------------------------------------------------------------------------------------------------------------------------------------------------- Can my family inherit my traditional individual retirement account (IRA)? If so, how do I makesure it passes to them?A: The answer to the first part of your question is yes. By designating your family as beneficiariesof your IRA, you not only give them access to the funds in the account, but you "stretch" the taxsheltering benefits of an IRA beyond your own life.To do so, you must be sure to legally designate your family members as the accountsbeneficiaries. Also, the Internal Revenue Service mandates required minimum distributions(RMDs) from your IRA each year once you turn 70 ½ years old. The amount of the RMD isdetermined by a "life expectancy factor" that the IRS publishes annually. Forget to take the RMD,and you or your heirs will pay a penalty of 50% on the amount that should have been withdrawn.Lets look at an example: a $300,000 IRA that grows and stretches into $2,139,189 over 3generations, based on a 7% annual rate of return. Harvey, age 70, names his wife, Myrna, as hissole beneficiary and over 2 years takes RMDs of $22,649 until passing away at age 71.Myrna, age 66, treats Harveys IRA as her own, names her son Marc as her sole beneficiary, andover 8 years takes RMDs of $156,123 until passing away at 77. Myrna can treat Harveys IRA as
  12. 12. her own because she is his spouse. Once it becomes hers, she is able to delay RMDs until sheturns 70 ½ years old.Marc, age 53, maintains the account as an inherited IRA, names his son Logan as his solebeneficiary, and takes RMDs totaling $933,576 (based on his own remaining life expectancy of 32years) over the course of 23 years until passing away at age 75.Logan, 41, takes RMDs of $1,026,841 (based on Marcs remaining life expectancy until assetsare divested) over the course of 9 years. Logan takes RMDs for 9 years because his father hadtaken RMDs for only 23 of his 32-year life expectancy (32-23=9). Total withdrawals are$2,139,189 over 3 generations.To fully realize the benefit of stretching your IRA in this way, you must avoid early withdrawals.Unfortunately, some investors view their IRAs as piggy banks, breaking them open wheneverunexpected expenses arise.From a financial standpoint this is a serious mistake, one that should be avoided if at all possible.Not only do you face a 10% penalty for withdrawals (under most circumstances) before the age of59 ½ and income taxes, but withdrawals from your IRA are difficult to replace due to IRS-mandated annual contribution limits.So to recap: Try to delay withdrawals from your IRA until required by the IRS. Designateappropriate beneficiaries, and instruct them to withdraw at the pace required by the IRS. Takethese steps, and your family can continue to reap the benefits of your IRA over multiplegenerations.-------------------------------------------------------------------------------------------------------------------------------------------------------------------