Roth recharacterization by executor

[Guest PaulW]

I have an interesting situation: a client in her 80's converted her IRA to a Roth in 1998. The amount converted was in excess of $600,000. She died this year with a taxable estate of approximately $1.5 million (45% marginal rate), and her beneficiaries are interested in recharacterizing the entire amount back to a "regular" IRA before 12/31/99. Two questions: 1) Is it permissable for the executor to "step into the decedent's shoes" and recharacterize the Roth? 2) Is it advisable to do so, if this is possible? I suspect that the answer to the second question is negative, in view of the fact that the income tax on the remaining 75% of the conversion amount will be on the final 1040, resulting in an estate tax deduction for the extra income tax due, but I welcome any comments.

[John G]

Did you get a reason why they want to switch back to a strandard IRA? It seems the conversion would reduce the taxable estate by perhaps 200K which reduces estate taxes by about 90K. The "credit" from estate taxes not paid would reduce the effective tax rate for the conversion and very likely place it below the marginal rate of the heirs.

Too bad your client didn't start writing $10,000 gift checks to reduce the estate size. At age 80+ that would have been a reasonable stategy.

[BPickerCPA]

Would you care to explain how her income was kept under $100K. It sounds like her required distribution, which would have had to be taken prior to the conversion, would put her close to that number. Then there's social security. Was all her other income from tax free sources?

[Guest PaulW]

To John G. - a) the heirs thought about this as a possibility since it would save some outlay of taxes at the present time. As you point out, the net cost of a Roth conversion in these circumstances is substantially reduced by the reduction of the taxable estate.

b) She has been giving $10,000 per person, per year to all of her heirs for some time.

To B. Picker - She was barely under the $100,000 limit for a Roth conversion, since almost all of her other investments were tax-free bonds. She also took a $3,000 capital loss on some securities.

[John G]

Advisability: further thoughts

If there are many heirs, taking spread out distributions, with very low tax rates... then you might be able to craft a case the heirs might prefer a standard IRA.

Remember to factor in the different state income tax treatment. The deceased and the heirs may live in states with different income tax rates. If everyone lives in the same state, then at first blush this would probably not be an issue... but what if the heirs plan to move to a no tax state such as Florida?

You were absolutely right this is an "interesting situation".