joetaxpayer <joetaxpayer[at]nospam.com> wrote:
- quote -

I understand the CPA article now. One more question: are
non-qualified stock options considered to be IRD?

<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

joetaxpayer wrote:
- quote -

I did read it, but I didn't see any particular relevance to
this situation. I have to admit, though, that I did not
read it as carefully as I might if I were getting paid for
doing it.

- quote -

If he takes funds out he pays income tax but presumably not
estate tax, is that the point? But to the extent the estate
pays income tax, there is a deduction for purposes of the
estate tax (which is generally at a higher bracket than the
income tax). So it should come out the same both ways.

Stu

<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

Seth wrote:
- quote -

An interesting thought. Of course the IRA is valued as you
said, at "face value" if populated with liquid securities. I
think your suggestion may apply if (and only if) there were
assets that had no liquidity at all, for example, a joint
venture where it's not obvious that an outsider would easily
wish to purchase the shares held within the IRA. This
strikes me as similar other estate planning techniques in
which shares of an (illiquid) family business are gifted at
a discount, sometimes $12K at a time, sometimes into a
trust, over time. In the end, the wealth transferred is
greater than the required amount for disclosure purposes.
Even a half share in a rental property would be the subject
of this type of 'discounting'.

JOE

<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

FB <noname[at]earthlink.net> wrote:

- quote -

That leads to an interesting issue: What is the Fair Market
Value of an IRA with $2.5 million in it?

If they were freely transferrable, and I had the cash, I
wouldn't pay $2 million for one, because taking the money
out would cause me to have less than $2 million after taxes.

Anybody who could afford to buy it for cash would probably
be in a high tax bracket, which lowers its value (to around
$1.5 million). On the other hand, the fact that money in it
grows tax-free increases its value.

The net answer is, I don't know, and there's probably some
specific mention in the Code that says it's valued at face
for estate tax purposes.

Seth

<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

Stuart Bronstein wrote:
- quote -

Stu - I humbly ask if you read the link, which I provided as
The CPA Journal appeared to be a trusted source. I also
found corroborating reference to this in Ed Slott's latest
book, "Parlay your IRA into a Family Fortune." I recalled
this rule (IRD) from having read the book when it was first
published, and googled to find the reference I posted.

The OP has replied, and is on a path to taking the funds out
to reduce the estate to avoid the double taxation, which
does not exist. That would be a shame.

JOE
www.joetaxpayer.com

<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

Herb Smith <smithff33[at]aol.com> wrote:
- quote -

Thanks for your reply. Given that the full value of the
tax-deferred account would be subject to the estate tax and
income tax, it would seem prudent for the account holder to
withdraw the full account while alive, pay the income tax,
and leave a smaller estate subject to estate tax (if any).
Of course, the account holder would lose the value of
tax-deferred growth of the account, but the double whammy of
income and estate tax on the whole amount must be more
onerous.

<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

joetaxpayer wrote:
- quote -

Sorry but this isn't an IRD issue. Income in respect of a
decedent means income which was earned during the lifetime
of the decedent, but which was not included in the
decedent's final tax return or an earlier one.

If an unliquidated asset (i.e. a debt) would otherwise be
included in the decedent's estate for estate tax purposes
but is also considered income in respect of a decedent, that
amount is not taxed twice. It is subject to income tax
(generally in a lower bracket than estate tax) and is
excluded from the estate for estate tax purposes.

Stu

<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

FB <non...[at]earthlink.net> wrote:

- quote -

Yes, indeedy. BTW, it is not an "estate tax credit", but
rather an estate tax exception.

- quote -

No

- quote -

The second one. BTW, the heir may have an income tax
deduction for the estate tax paid on a portion of the IRA
account.

In addition, there is NO stepup of basis in the tax deferred
account so income tax is due on the entire amount, when
distributed.

<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

FB wrote:

- quote -

The issue is addressed by the "income in respect of a
decedent" (IRD) rules as described in great details at:
http://www.nysscpa.org/cpajournal/20...es/f93400a.htm

If the scenario you describe has not yet occurred, I'd first
ask if there's a spouse, in which case the use of a properly
set up trust can allow for the unlimited marital transfer,
and preserve the $2M for the other beneficiaries.
Alternately, the use of Roth conversions can reduce the
estate, and give the beneficiaries a 'denser' inheritance.
(i.e. one no taxable at all). Last, one can gift $12K/yr to
any number of recipients during their lifetime, another way
to get money out of one's taxable estate.

Joe
www.joetaxpayer.com

<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

FB wrote:

- quote -

Yes. Well, actually the entire $2.5 million is subject to
tax, with a credit for the tax that would be owed on $2
million. The difference is that the tax calculated this way
is in a higher bracket than just taxing $500,000.

- quote -

Income tax and estate tax are separate and have little to do
with each other. So the answer to that is no.

By the way, income tax on that amount may or may not be
deferred after death, depending on who the beneficiary and
how it is handled.

- quote -

Estate tax is due on the full amount, and income tax is due
on the full amount that is subject to income tax unless a
further deferral applies. There may be an estate tax
deduction for income tax paid, or an income tax deduction
for estate tax paid, but I don't know that off the top of my
head.

Stu

<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

Let's say that one's estate consists entirely of a
tax-deferred account (IRA or 401k) containing $2.5 million.
That exceeds the current $2 million estate tax credit, so is
$500K subject to estate tax? Or, because there is a deferred
tax liability on the $2.5 million, does the law allow
adjustment of the account value to recognize that income tax
liability before determining the size of the estate? Could
an heir withdraw the full account value, pay income tax on
the withdrawl, and then determine the estate value, or is
the estate tax due on the full amount of the account
pre-tax, in addition to the deferred income tax?

<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >