If allowed to pass through the inheritance process, most IRAs are allowed to convert to an IRA-beneficiary account that doesn’t require all the income tax to be paid immediately as would be required through gifting the IRA to another person (excluding charitable gifts). Therefore, as advisors make sure you know exactly what you are recommending to clients because IRAs are a completely different animal in the gifting-versus-inheritance tax equation.    

Hopefully, I’ve shed a little more light on the complexity of the gifting-versus-inheritance tax dilemma.  I apologize for not hitting on all areas of concern such as the generation skipping tax.     

I hope the takeaway is for advisors is to analyze clients’ situations very carefully. It’s vitally important to assess the tax recommendation risks that gift and inheritance taxes pose. However, if a client has less than $10 million in net worth ($5 million per person assuming a married couple), I believe the potential gain is not worth the risk for a mere possible 20% tax benefit spread of 35% versus 55% (assuming no later capital gains tax would be owed on any of the gifted property).  In my view, that would be another “gamble of a lifetime” and not worth risking.

 

Andrew D. Rice, CPA, AIF, CTS, WMS, is vice president of Money Management Services, Inc., an independent RIA firm in Birmingham, Ala.  He is a Certified Public Accountant, Accredited Investment Fiduciary, Certified Tax Specialist and Wealth Management Specialist. He can be reached at [email protected].

 

For more on estate planning, see:

Charitable Giving: 5 Ways to Lead by Example

5 Important Steps to Update Estate Plans

Estate Planners: 9 Months Left for Tax-Free Transfer of $10 Million