Income Taxes

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Certain estate assets carry with them adverse income tax implications for personal beneficiaries, in addition to any estate tax obligation. For estate planning purposes, it is very important to identify these tax-encumbered items. They are summarized below:

• Tax-deferred retirement funds, such as traditional IRAs (not Roth IRAs), 401(k)s and 403(b)s
• Series EE and HH Savings Bonds (to the extent that income has not been reported annually)
• Stock options (those which have not expired at the time of death)
• Deferred income and other accrued but not realized income such as partnership income, royalties, etc.
• Accounts receivable from a trade or business

In the list above, the first item, tax-deferred retirement accounts, deserves special consideration. This is because the ramifications of income tax on these accounts can be significant. As you are probably aware, any withdrawals made from these accounts during your lifetime are taxed as ordinary income. Moreover, if your death occurs before withdrawals are made from these accounts, any distribution to personal beneficiaries is subject to an income in respect of decedent (IRD) tax. Basically, the funds are taxed as ordinary income before distribution to your beneficiaries, with a deduction given for any estate taxes paid. Because of this, we recommend that any charitable giving in your estate plan be funded first through these assets.

To accomplish this, at the time of death, tax-deferred retirement assets (or any tax-encumbered assets in the list above) could be given outright to charity or distributed to charity through a testamentary charitable remainder trust agreement.

Overview of Estate Planning
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