Estate tax deduction for taxes pd on recharacterized Roth IRA?

[Guest M. Thomson]

Client converts regular IRA to Roth IRA, pays taxes on the recharacterization, then dies:

- there is estate tax due on the Roth IRA in the estate. Does the estate get a credit or deduction for the taxes paid on the Roth, or do you lose the taxes paid for recharacterization???

- could the estate go back and amend the tax return for the year of recharacterization and get back the taxes paid in this way??

Any help is much appreciated!

[mbozek]

Dont know whether the executor of the estate would have the power to recharacterize the Roth IRA. As a general rule executors cannot make tax free transfers on behalf of deceased owner- e.g., executor can't open an IRA for a deceased employee who received a lump sum distribution.

Only income tax deduction is for amount of estate taxes paid which are attributable to the IRA- the amount is deducted from the amount of the taxable distribution from the IRA. If Roth distribution is not taxable then there is no benefit from estate tax offset.

[Guest reg_h2b]

Mbozek-

An executor CAN recharacterize-- whether required or not-- the decedent's Roth IRA per Roth IRA Final Regulations.

No opinion on the rest of this stuff.

[Mary Kay Foss]

There is no direct estate tax deduction or credit for the income taxes paid on the Roth recharacterization. However, the gross estate is already reduced because the payment was made before death.

The recharacterization can only be done if it's within the time period. A 2001 conversion could be recharacterized up until 10/15/2002.

If the Roth qualifies to be recharacterized and IS in fact recharacterized, it will be a traditional IRA -- still subject to estate tax and income taxes will be due by the heirs when they receive the proceeds. The estate will also be increased by the income tax refund related to the recharacterization.

In planning for terminally ill clients we often consider a "deathbed " Roth conversion because the income taxes on the conversion are deductible on the estate tax return. Often a tax year shortened by death is the only time AGI is low enough for a Roth conversion.

It seems to me that the predeath recharacterization and tax payment was a good thing and shouldn't be undone.