Avoid The 75% Tax Trap —
Give More to Your Heirs, Instead of 75% to IRS…

(Watch this video on Basic Estate Planning Mistakes to Avoid and know more than most advisors.)

You may not have ever given it a thought before, but you can be sure that the taxing authorities have.

What happens to all that tax-deferred money, money that you socked away for retirement without paying income tax on it?

As you undoubtedly know, you pay income tax on it when you withdraw it in retirement. But what happens to it if you die before it’s had a chance to be withdrawn, and therefore, had a chance to have income taxes levied? Well, the income tax authorities want to get their hands on it, of course.

Technically, this money is called Income in Respect to Decedent (IRD). IRD includes any income an individual is entitled to but didn’t receive over his/her lifetime, such as the money deferred into to IRAs and within pension funds.

In high income estates, such money ends up being double-taxed — taxed both by the “original” income taxing authorities, as well taxed as a part of estate taxes.

As an example (in a not untypical situation in a large estate), if a $1,000,000 IRA passes into the estate, the following taxes could easily be levied:

IRA $1,000,000
Estate Tax ($500,000)
   
Assets After Estate Taxes $500,000
Income Taxes (State and Federal) ($250,000)*
Ira Assets After Taxes $250,000
TOTAL TAXES $750,000

 

*This is an approximation, based upon on quite technical calculations. For more information contact us at the information below.

That’s right. In such cases — all too frequently — the taxes on the deferred income are 75% of what was in estate.

And few financial advisors even consider what happens to such deferred income when it passes into the estate of their high income clients.

However, those that do usually offer one of the following:

  • The Legal Solution (Gifting IRA asset) — but then your heirs receive nothing of the IRA.
  • The insurance solution — putting the money into an Irrevocable Life Insurance Trust during the your lifetime. While this works, it is somewhat complicated, and there is a better choice (see below).
  • The investment solution — frequently, the use of a new kind of IRA, a “Stretch IRA” is suggested. However, this can create a difficult financial situation for your heirs.

What we suggest:

Use a Qualified Pension Insurance Partnership (QPIP) to mitigate the problems. In its basic form it is not too complicated and one that can be very beneficial to you and your heirs.

An explanation of how this works –even though known by few advisors — can be had by contacting our offices at 612-202-0942 — or just sign up for a free consultation, type in your questions, and we’ll get back to you with the answers asap.

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