Estate taxes on IRA

[Guest P A Weick]

I always understood that 50% of the IRA, if it is community property, would be includible in your estate for estate tax purposes. The balance would be your wife's community interest and thus excluded from your estate. If you named your wife as beneficiary for the non-community half, it would be eligble for the estate tax marital deduction.

None of this addresses the better income tax elections available if the IRA goes to your wife in full.

If this is critical to your estate planning you should check with a California attorney.

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[This message has been edited by P A Weick (edited 06-11-99).]

[Guest Upland]

How do you value assets owned outside an A/B type trust (e.g. IRA, Roth, Life Insurance) for estate tax purposes when living in a community property state (CA).

Specifics: My wife and I have an A/B trust. I have assets in an IRA under my name and own also an insurance policy. In both cases the assets were acquired during the marriage and my wife is the primary beneficary. When I die is all of the IRA etc or only 50% of the IRA etc considered when calculating the value of the estate. - It is my understanding that in the event of a divorce my wife would be considered as a 50% owner of the IRA

Thanks

[Guest Jenny E]

This question raises valuation issues. Surviving wife is only 45 and has $100,000 in her IRA (all community property). Husband dies. Is his half of IRA valued at $50,000 on his estate tax return? Shouldn't it be discounted, at least 10%, as any withdrawal is subject to the ten percent penalty excise tax. I think it should be discounted even more, because she doesn't have to pull it out for another 25 years and there may be nothing in it at that time. How have others handled this?

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Jenny E

[mbozek]

Found this thread while researching new valuation question: Can value of IRA for estate tax purposes be eligible for a valuation discount on the grounds that it is an illiquid asset that can only be cashed out at a substantial penalty for income taxes. A recent article (4/1/02) in the NY Law Journal suggests that there is precedent under the tax law although there is no IRS ruling or tax ct case. Valuation discounts are recoginzed for unmarketable and/or illiquid assets such as minority interests in closely held company, limited partnerships, etc. Any Ideas? The conventional wisdom is that the income tax deduction under IRC 691© is the set off.

Needless to say this issue is only relevant if non spouse is the beneficary of IRA and gross estate will exceed $1 Mill in 2002, 1.5M in 2004, etc.

[Mary Kay Foss]

Mike Jones is a CPA in Monterey CA who specializes in IRAs and other retirement plan issues. I know he has issued valuation letters in more than one case indicating that the value of the retirement funds is less than the date of death market value because of the income taxes to be paid. I believe his reasoning is similar to that used to take into account built in gain within a corporation when it is valued for estate tax purposes.

There have been recent tax cases where the discount is allowed in valuing the corporation because "a willing buyer" would not have access to the assets without the double tax on a corporate liquidation. It makes sense to me that the logic would apply with retirement plan assets as well.

[mbozek]

These arguments were also raised in the NYLJ article-- however under the tax law retirement benefits are different- they are not a capital asset which gets a stepped up basis at death. As a matter of tax policy retirement benefits are deferred compensation (with exceptions for employer stock) which are taxable under IRC 72 under the rules for IRD when paid. Under IRC 691 © the pro rata amount of estate tax is deducted from items of IRD. Allowing a valuation benefit would give retirment benefits a double benefit. However, I have heard stories from other practitioners that IRS reviewers have granted valuation discounts for IRAs in estate taxes cases on the grounds you suggested.