| Many people have substantial sums invested in individual retirement accounts (IRAs). In fact, it's not unusual for a rollover IRA — one holding distributions from a qualified retirement plan — to be a family's most important asset.
While owning these assets may make you rich on paper, this wealth could go up in smoke if the IRA isn't handled correctly.
If you take the money out of the IRA, you must pay income tax on it. If you leave it in the IRA until death, the date-of-death account balance will be subject to estate tax. (You're probably aware that the estate tax has been repealed. However, the repeal is effective only for 2010. The estate tax is scheduled to return in 2011, and may even return before then if Congress reinstates the tax retroactively. ) Plus, your beneficiaries will still have to pay income tax on what's left.
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By designating a qualified terminable interest property (QTIP) trust as the beneficiary of your IRA, you can postpone paying estate taxes on the property until your spouse's death, and provide for your spouse during his or her lifetime. And you can do this while protecting the property for ultimate distribution to your children.
An IRA-to-QTIP trust arrangement can minimize your taxes and meet your non-tax objectives. But the arrangement must be carefully structured, or your spouse and children may lose the benefit of income tax and estate tax deferral. Payout of an IRA must comply with technical provisions of the income tax law. QTIP trusts must satisfy estate tax requirements. Meshing the two sets of rules is complicated. |
