Individual Retirement Accounts ("IRS"), 401(k), Pension, Profit Sharing, and Keogh Plans are called tax-deferred plans because income tax is not paid when contributions are made. The income taxes are deferred until you withdraw the money at a later time - ideally, at your retirement when your income (and tax bracket) is lower. But, sooner or later, the income taxes must be paid. If your interest in the retirement asset is passed on to a surviving spouse, the asset may be subject to both Income Tax and Estate Tax Liability.

COORDINATING INCOME TAX PLANNING

"Stretch Out Planning." Tax-deferred assets grow at an accelerated rate because the asset accumulates interest income that is free of income taxation. Unless distributions from an income tax-deferred asset is needed, it is generally a good idea to keep the asset growing in an income tax free environment. However, distributions from tax-deferred assets are required to begin at a Required Beginning Date ("RBD Date"). The Minimum Distribution Requirement ("MDR") is calculated by the life expectancy of the participant (owner). Consequently, the MDR will subject the participant to unnecessary income tax liability as well as erode the accelerated growth of the income tax-deferred assets. "Stretch Out Planning" strategies are intended to minimize the MDR and keep tax-deferred assets growing at an accelerated rate in an income tax free environment.

Roll Over Planning for Married Couples. "Roll Over Planning" is designed to keep MDR to a minimum. Generally, the participant will name a spouse as the designated beneficiary. A surviving spouse will then "rollover" the proceeds into his or her own tax-deferred asset as the owner, further delaying payment of income taxes. The surviving spouse than has the opportunity to name a younger individual as a joint beneficiary and further minimize MDR based on life expectancy calculated on the joint lives.

Naming a Living Trust as the Designated Beneficiary. Naming a Living Trust as the Beneficiary of your tax-deferred assets can provide you with more control over the final distribution of the asset after your death, but there are some tax disadvantages. After your life, the MDR is calculated upon the life expectancy of the oldest beneficiary of the trust. Accordingly, the benefits of "Roll Over Planning" are lost.

COORDINATING GIFT & ESTATE TAX PLANNING: 

 All lump-sum retirement or pension payments, such as the remaining balance in an IRA, profit sharing account or 401(k) plan, are subject to Estate Tax. If the deceased's estate, including a lump-sum retirement payment, exceeds the Applicable Exclusion Amount (currently $625,000), taxes will be assessed.

Unlimited Marital Deduction. If the spouse names the surviving spouse as the beneficiary for a lump-sum payment, the Estate Tax is deferred until the end of the surviving spouse's life because of the Unlimited Marital Deduction. However, this can result in higher levels of Estate Tax on the surviving spouse's estate.

Charitable Remainder Trusts (CRT). Because of the Income Tax and Estate Tax consequences associated to retirement assets, the CRT offers some solutions. A CRT can be used to remove tax-deferred assets from your Taxable Estate, while giving you the option of income equivalent to a fixed value or a fixed percentage of the CRT assets' fair market value. You can benefit the charity of your choice in the future but still receive a current-year charitable deduction from income taxes. The CRT will convert your retirement asset into lifetime income while removing the asset from your Taxable Estate.