Avoid the 75% Tax Trap

Avoid the 75% Tax Trap

Give More to Your Heirs Instead of 75% to IRS…

Would it shock or upset you to learn that after taking 20-30+ years to accumulate wealth, with poor planning, at your death, 75% or more or your assets may go to the government not your heirs?

Most people have no idea that a 75% tax may be waiting for them at death.

Who does the 75% tax trap affect?

People who have estate tax problems at death and money in a tax deferred IRA or qualified retirement plan.

As you undoubtedly know, you pay income tax on money withdrawn from IRAs and qualified retirement plans. However, what happens to that money if you’ve not withdrawn it prior to death?  The IRS will want income taxes paid on the entire balance of your deferred assets and estate taxes as well for those who have estate tax problems.

If you add up both the income and estate taxes levied on tax-deferred assets at your death, the taxes canexceed 75%.

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

*This is an approximation. The exact calculation of this number is quite complicated.

As you can see, the taxes on the deferred income are 75% leaving the heirs upset and probably confused.

Few financial advisors even consider what happens to such deferred income when it passes into the estate of their high- income clients. Fewer yet know any solutions for how to mitigate this tax and maximize the amount of wealth passed to the heirs.

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

• The Legal Solution (gifting IRA asset) — You can simply gift an IRA to a charity upon death and avoid all taxes.  But then your heirs receive nothing of the IRA.
• Liquidate and Leverage (L&L)— Simply take systematic distributions from your IRA and gift that money to an Irrevocable Life Insurance Trust where the largest guaranteed death benefit policy can be purchased. When you run the numbers on L&L vs. doing nothing, the heirs come out a big winner.
• Stretch IRA — You will often hear financial advisors talk about stretch IRAs as an estate planning/wealth transfer tool.  They work fine for people who do NOT have an estate tax problem.  However, they don’t work if you have an estate tax problem because while the stretch will delay income taxes due, it will not delay the estate tax that’s due. Typically what happens is that a child will be forced to liquidate the IRA so the estate taxes can be paid.  When this happens, income taxes and potentially penalties will be due.  It is not a pretty site and it is not recommended.
• IRA/Pension Rescue — This is the preferred solution for those with large estates.  A rescue plan is somewhat complicated and outside the scope of material on this web-site.  What we will tell you is that a true IRA/pension rescue plan will reduce the amount of income taxes due on money in an IRA/pension by up to 40%.

For a detailed summary of how an IRA/pension rescue plan may work for your situation, please e-mail info@thewpi.org or call 269-216-9978.