Disclaiming tIRA as an estate planning tool

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Disclaiming tIRA as an estate planning tool

Post by Norton750 » Mon Jan 13, 2020 3:20 pm

My wife and I are in our late 60's. We live in Massachusetts which has a $1M estate tax exemption (w/o portability) and a progressive estate tax that tops out at 16%. We have two unmarried independent adult children. We greatly appreciate simplicity in our financial affairs and would prefer to not have to deal with irrevocable trusts. We will not pay any federal estate tax even if the current amounts are halved at the end of 2025. We hold much of our portfolio in traditional IRAs.

Typical Approach
Part of the standard estate planning approach would be for us each to have a bypass trust in place so that the first to die would put $1M into a bypass trust and thus “preserve” their MA estate tax exemption upon their death. These trusts typically have the surviving spouse as the beneficiary with any remainder going to the children upon the death of the second spouse.

Our Thoughts
We prefer not to set up (nor have the surviving spouse have to deal with) such bypass trusts. What we plan to do is for the surviving spouse to disclaim $1M from the deceased spouse’s traditional IRA so that it is divided evenly between our two children in separate inherited traditional IRAs. We can comfortably afford to do this under any circumstances that we can currently foresee.

Advantages of this plan include:
  • No cost to set up – simply use the proper beneficiary designation on our traditional IRAs.
  • The full amount of the MA estate exemption is utilized.
  • There is no bypass trust, no need to file trust income taxes each year, generate K-1 forms, etc.
  • The surviving spouse need not disclaim if unforeseen circumstances have arisen. And the plan can be altered up to the death of the first spouse.
  • Our children receive a meaningful amount of inheritance earlier than they would if both parents had to pass before there was any inheritance.
  • The surviving spouse gets a good idea of how the children deal with the funds as they are distributed from the inherited IRAs over the required 10-year distribution period.
  • The children start a 10-year IRA distribution period for these funds that is separate from (but may end up overlapping with) the one that will be triggered by the death of the second spouse.
  • This would lower the RMDs required of the surviving spouse just at the time when the survivor’s income tax rate will be increasing as they begin to file taxes as a Single.
  • There is no “loss of the step up basis” that would occur if appreciated assets were gifted to children by a living parent.
The simplicity of this plan is a large part of its appeal to us. This does leave inheritance to our children w/o the protection of any sort of trust – but they are trustworthy and this is our preference.

There is a proposal to double the MA estate tax exemption, and this might cause a rethink if it came to pass. But who knows what the MA legislature will actually do in the future?

For us, this plan appears to have a number of advantages and little downside under current tax laws. It does require that the surviving spouse be competent and willing to follow through with this planning. Obviously the timing of the plan is a complete unknown, but such is the lot of estate planning in general.

Comments, criticisms, suggestions?

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Re: Disclaiming tIRA as an estate planning tool

Post by bsteiner » Mon Jan 13, 2020 3:25 pm

That's an option. You could also include disclaimer trusts in your Wills to give the surviving spouse the choice of disclaiming some of the retirement benefits or disclaiming some of the other assets.

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Re: Disclaiming tIRA as an estate planning tool

Post by jeffyscott » Mon Jan 13, 2020 5:36 pm

No estate tax issues, but this is something I had thought about as a possibility even before the secure act. For us it'd be a few hundred thousand divided 3 ways, but since pensions and SS are expected to be more than enough, why not let some of the excess go to the kids early?

In our case, sole survivor would likely move from the 12% bracket to 22%, while if the kids are old enough and retired, they'd more likely be in 12% bracket, as it seems none will have a pension. We first need to both live long enough so that kids are at least early retirement age, though.
Time is your friend; impulse is your enemy. - John C. Bogle

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Re: Disclaiming tIRA as an estate planning tool

Post by Carl53 » Mon Jan 13, 2020 6:10 pm

I kind of like the thought of this. Our kids are already listed as secondary beneficiaries on our ever growing Roths (thanks to annual conversions) that we most likely will never touch. I view these as the best choice of funds to disclaim as it is likely the kids will be in a higher tax bracket than we or whichever of us has the opportunity to file as single when that time comes. The kids are also secondary beneficiaries along with several charities on TIRAs that are still slowly growing despite annual conversions. I expect that QCDs ultimately will manage the TIRAs growth as the Roths will exceed them in the next couple of years.

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Re: Disclaiming tIRA as an estate planning tool

Post by JGoneRiding » Tue Jan 14, 2020 3:17 pm

So my grandma is exceptionally long lived and her husband less so. She was married 50 yr and been a widow half again as long.

All the money is now gone.

Just a thought. Of course Medicaid works well in this situation.

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