One particular estate planning technique used by many Florida residents has recently come under fire in the U.S. Senate. Max Baucus, the U.S. Senate Finance Committee Chairman, has proposed making changes to estate planning law with regard to how inherited individual retirement accounts, or IRAs, are taxed. Specifically, the senator has proposed tighter restrictions on how IRAs are transferred to beneficiaries.
As of now, the law lets the holder of an inherited IRA receive taxable distributions over the anticipated span of his or her lifetime. However, the senator says the practice has been abused by people who give tax-free benefits to younger beneficiaries.
If passed into law, here is how the proposal would work: younger beneficiaries would be required to pay taxes on IRA inheritances over the course of five years instead of over the course the beneficiary's remaining lifetime. The primary aim of the proposal is to end a tax-planning technique that allows many Florida residents to accumulate tax-deferred gains within IRAs. It is also expected that the new tax plan would give the U.S. Treasury $4.6 billion over the course of the next 10 years. The proposal is meant to go into effect for those IRA owners who die in 2013 or after.
The proposal does include some exceptions for beneficiaries who are disabled or chronically ill. There are also exceptions for the spouses of IRA owners and for beneficiaries whose age is within 10 years of that of the account holder. Also, until reaching adulthood, children would also be exempt from the five-year tax rule.
IRA owners and beneficiaries throughout South Florida will want to be aware of how the proposal might affect the distribution of their retirement accounts. If the plan is made into law, methods of estate planning will be considerably changed, meaning the new system may require some creative thinking on the part of anyone concerned with preserving and distributing assets.
Source: Bloomberg, "Sen. Baucus Eyes Inherited IRAs for $4.6B," Richard Rubin, Feb. 7, 2012