While this is a common misconception, I believe it mixes up two ideas, estate planning and estate tax planning. Estate tax planing is actually a small, but important, part of the overall estate planning process.
Estate planning is about making sure your estate is in order and passes as you wish. Estate tax planning is making sure the government gets as little of your estate as you can.
Estate planning uses a trust, or a will, to organize your affairs and distribute it to who you care about when you die. Estate planning is for tax and non-tax reasons. Of course no one is required to have an estate plan. Many would be unhappy to know that our legislature in Arizona has written an estate plan for everyone that hasn’t written an estate plan themselves.
Self directed IRAs (SDIRA) have been around since the early 1970s. In spite of their history, they haven’t been all the rage until more recently thanks to media attention. The biggest press was on former Republican candidate Mitt Romney’s SDIRA. It shouldn’t be believed that only the most wealthy can use SDIRA as part of their total retirement financial and estate planning.
SDIRA give everyone more control and investment options vs. regular IRAs. This is due to the individual being able to control the investments instead of a brokerage firm or bank. More than just being in control of the IRA, the SDIRA permits a whole lot of investments options instead of just traded securities. Examples include real estate, private equities, precious metals, and much more.
Not all is rosy with SDIRA. The assumption is that the manager of the IRA, the individual investor him or herself, needs to have some experience in the investments they are managing. Too often a manager or adviser is hired to assist the individual on the investments. This is an added cost.
Further drawbacks on tax and legal regulations. Provisions against self-dealing and avoiding too much involvement in the operation of a business are just a couple of the potential pitfalls.
SDIRA can be a part of a person’s financial and estate planning but care should be taken before taking hold of the wheels of this type of IRA.
This question gets asked a lot. Sometimes it is asked if the Feds or Arizona tax you when you die? Sometimes it is asked if the State gets part of your estate when you die? Mostly it is thought of in terms of probate whether you have a Last Will & Testament or not.
The short and simple answer for almost everyone is zero, the Feds and Arizona gets absolutely nothing when you die. Of course there are exceptions, but they are very limited.
One exception is if your total estate is over $5,250,000 at least for year 2013. If a married couple have done proper estate planning they can pass $10,500,000 this year estate tax free. And no, the State of Arizona does not have an inheritance or death tax. Some states do but Arizona does not.
Another exception is if you do not have a Will or Trust and you have no heirs. This means no parents, children, spouse, nieces and nephews, cousins, etc. Very rare, but possible. If this is the case, the State of Arizona takes the entire estate.
Another exception, but I don’t really think this should be thought of as an exception but basic taxation, is that if you have any assets that are pre-tax, for example an IRA, then when the funds are distributed, they are subject to income tax as they would have been if the person was still alive.
So in answer to the question, no, the Feds and the State of Arizona will very unlikely get a piece of your Estate. Of course this doesn’t mean your Estate will go where you want it to without careful estate planning. That is a subject of another post.
Another trend in Living Trusts, or better said, Estate Planning, are IRA Qualified Trusts. Very often a individual does not want to leave a large IRA to their children or other heirs. The concern is they will cash it in and pay the large tax bill that will surely come when the IRA is liquidated.
One popular option is a special trust that can be the beneficiary of the IRA or other qualified plan. The trust can restrict the distribution of the IRA to over the life expectancy of the loved one. In essence, the heir can have the IRA, enjoy the benefit of the IRA but can only access the IRA over the number of years of their life expectancy. This is a good option for someone that may not be very wise with money or money management.
Note that your basic living trust may not accomplish this same goal and a special IRA trust is required.
If you have any questions, please give us a call at Knollmiller & Arenofsky, LLP.