Roth IRA Conversion in Estate

[Guest Misty]

My ailing Dad has an estate valued at 1.4 mil., 3 adult benes. 800,000 in qualified plan. He has been given 2 options-a) leave as is, pay IRS 154,000 in Federal Estate Tax and the estate to pay remaining taxes due($270,000+) or b) sign an intent to rollover the 800,000 into a Roth IRA. . . if he dies administer the paper and pay the tax liability of 275,000 for the conversion with the sale of his home and gift an add't 95,000. He is very uncomfortable with B as he doesn't want to pay the taxes, should he make it through this illness and he wants to make sure all his children have the flexiblity to do what their individual needs are. Are there any other options available? IF he signed the intent to rollover, is it ethical to hold this until the outcome is determined and also if he signed will all three children be flexible to invest as they wish-if one wanted to specify education, one wanted to cash out and one wanted retirement. Would there be any penalties to withdraw? Thank you kindly for any advice.

[John G]

Misty,

As much the professionals on this board would like to make suggestions, I think you have a delicate problem that probably requires an immediate consultation with an attorney and tax accountant specializing in estate plans.

You may have multiple options such as gifts to family members, how real estate is titled and retirement plan restructuring.... depending upon how long your father lives. Are there any grandchildren going to college? He may be able to directly pay the tuition and reduce his estate. If your father supports a number of religious or charitable organizations, pre-paying what he would donate in the next few years would reduce his taxable estate.

But, first and foremost, my advice is, with your father's approval, consult with some estate planning specialists. Plural... I would talk with at least three different ones to see with whom you are comfortable and to get a feel for their knowledge. You may need someone who is very good at explaining options - your dad should know the consequences of doing nothing.

[BPickerCPA]

Misty,

Besides what John said, you also MUST make sure that all your dad's affairs are in order. Is his will up to date? Are their PROPER beneficiary designations on the retirement accounts?

There is no harm in having things properly set up, and their not being needed. There is TREMENDOUS harm in needing things to be properly set up, and their not having been.

There is also a question as to whether you can complete a Roth conversion after death. Whoever gave you that suggestion may not be giving you the best advice.

[mbozek]

I dont know how you came up with the taxes but your father needs to consult with a estate planning attorney to review his estate plan. Second The estate tax unified credit increases to 1.5 million on January 1, 2004 which would eliminate any estate taxes on his property (if no lifetime gifts have been made). I think he needs to review whether it would be better for him to pay the 275k taxes by converting the IRA in 2003 and reduce reduce his estate tax by $115,000 or wait for the estate tax unified credit to rise to 1.5m in 2004 and eliminate the estate tax liability.

[Appleby]

or b) sign an intent to rollover the 800,000 into a Roth IRA. . . .

Can’t put my hands on the ruling right now, but recently.. it was held that a distribution request that was in-transit when the participant died is not considered received by the plan. Therefore, the distribution request was null and void. The same may apply to a Roth conversion request, which is in effect a distribution and a rollover. Further, once an IRA Custodian is notified that the IRA owner is deceased, the IRA should be flagged as such and the only transactions that are allowed after that are distributions ( or transfers or rollovers for spouses ) to the beneficiary/ies.

[mbozek]

Its PLR 200204038. The beneficary succeeds to all rights under the plan upon the death of the owner.

[Bruce Steiner]

While this matter may be urgent, it is not particularly difficult; and the estate is not particularly large. To consult with three lawyers would likely double the cost of the project. I suggest consulting with one good lawyer, but doing so right away.

Why would he not convert to a Roth?

Why has he not considered leaving the children's share in trust rather than outright? Suppose a child (i) has a taxable estate, (ii) has a creditor problem, (iii) goes into a nursing home and wants Medicaid, (iv) gets divorced, or (iv) outlives his/her spouse and remarries. With 3 children, there's a good chance at least one of these things will happen to at least one child.

[John G]

Bruce - some good points. All of the responses above are based upon a minimal amount of info on facts and circumstances. We don't know if the wife is alive/divorced, the age of children (sounds like they are grown), if all potential beneficiaries are able to handle their own finances, nature of non-IRA assets, etc. Stepped up basis of non-IRA assets may be a factor in choosing an approach. We don't know the value of any primary resident. The "answer" may change based upon further info if Misty posts again.

I was not suggesting going through a full blown estate plan on three parallel paths, that would indeed be expensive and confusing. Rather, I was recommending spending at least an hour with three different attorneys/estate specialists to choose wisely someone who listens, has experience in the needed areas and has the time available. In my experience, sometimes the first mistake is in choosing your consultant.

Why not convert? Well, one reason could be tax liability. We don't know the marginal rate of any of the participants, nor what state they live in. If dad lives in a state with income taxes but the children do not, conversion could be more expensive. If dad's rate is at the high end and some potential beneficiaries are at the lower end, that might make a difference. It is likely dad qualifies for conversion, but we don't know that for sure.

Misty, I hope you will post again and let us know how you are progressing.

[Mary Kay Foss]

A 2003 conversion to Roth could be recharacterized up until October 15, 2004. In addition, an executor can recharacterize if the owner of the account passes away before October 15, 2004. If the concern is whether the Roth conversion occurs timely, it may be best to convert now and study the situation between now and 10/15/2004.

[Guest Misty]

Thank you for your invaluable knowledge. My Dad was approached six mnths ago with Roth option and has refused to sign because he doesn't know all the answers---will the kids still have the flexibility to do with the money as they wish, is it ethical to sign the paper and hold until the outcome is determined (this is very delicate), if the paper is administered and he survives this illness he doesn't want to be strapped with a 270K tax liability and decrease his estate. Mainly, he just doesn't feel comfortable signing it and I can't believe he only has option a or b. In answer to your questions, he's a widower, the 3 kids are 35-43, each around 30% tax bracket, no credit issues, our main difference is the age of our children-one begins the college years in 3 years the other two begin in 13. One has already set up a college fund. He is no longer employed, his house is valued at 325K and the majority of his estate is in an IRA. I like the idea of gathering 3 other opinions, unfortunately he is hospitalized right now and really is content with option A. Thank you so much for your time and sharing your expertise. Misty