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Disclaiming Annuity/IRA

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TXSK

Junior Member
What is the name of your state? Texas

My mother died 4 months ago and left seven tax deferred accounts plus other assets to me and my 2 siblings. Three are annuity contracts inside an IRA acct, one is annuity inside a non-qual acct, the remaining three are traditional IRA w/ misc investments. None of the annuities are annuitized yet. I originally wanted to disclaim some or all of the tax deferred accounts and let them pass through to my children so they could pay the taxes at their low tax rate instead of my high rate.
I'm not sure about the IRA's yet but on the Annuity contracts, if I disclaim them my portion gets split by my siblings instead of passing through to my heirs. My idea, that my siblings are agreeable to, is for all three of us to disclaim the annuities (and maybe the IRA's also) and (according to the ins. co. specialist) the account would then go to the 'Estate'. The will simply divides the estate three ways, share and share alike, so we are effectively ending up back where we started except the estate would be responsible for the taxes rather than the beneficiaries. Assuming that the estate would have a lower tax rate than the beneficiaries, we then save some taxes. We would let the estate draw from the annuities over 5 years to help keep the rate down. Total estate including tax deferred accounts is less than $900k, and tax deferred accounts total about $250k. One sibling at low tax rate now, me and other sibling at high rate.
Several questions arise from this scenario. How are estates taxed on income to the estate, like annuity/IRA payments, investment income etc.? Is it the same tax rate table as for individuals, or a different higher rate. Can we all disclaim to the annuities and then effectively receive the same monies from the estate? On the Traditional IRA's, does disclaimed portion pass through to heirs, or split among other Primary Beneficiaries like the annuities? Or is this a company by company contract issue? Any problems with my scenario and is it going to bite me?
Thanks, Joe
 


tranquility

Senior Member
*Any* problems? My goodness, it's full of problems. Tax, financial and legal ones. I am not going to spend the time to write a book to point out all of them, but I don't think many of your assumptions are correct at all. See a CPA. Bring in the numbers (at least rough estimates) and he will tell the ramifications to your choices.

A few things to remember:
--The estate will not have a lower rate than you have personally and anytime the "estate" pays tax, it comes out of the beneficiary's pocket.
--I haven't checked TX law, but, in many states a disclaimer is a *disclaimer*. A person would not need to disclaim twice. This is true with special bequests, but I'm not sure it is the same for a beneficiary. It is best to check it out beforehand.
--The law has changed regarding the inclusion of income of a child at the parent's rate. Getting IRAs into the hands of your children can only help if you want to use their lives as the measuring life and extend out the distribution. Because of the weirdness involved in your scenario, you might have GST issues.
--
 

anteater

Senior Member
Just to add to tranquility's point about estate income tax rates, the marginal rates for estate/trust income escalate rapidly -- 35% for income over $10,450 in 2007. That is why most trusts/estates pass any income through to the beneficiaries. The beneficiaries' tax rates are almost always lower.
 

Dandy Don

Senior Member
Your post is somewhat confusing because first you say that if you disclaim the annuities the amounts will be split by your siblings and then you later say that they will go to your children through the estate.

Yes, you should have a professional CPA or tax accountant work the numbers to see exactly how each scenario would work out to see which one is best. You may be making this harder than it needs to be, whereas it may be better for you to accept the money and then set up a trust account or CD or whatever to leave it to your heirs.

Another complication: are these annuities and IRA's mentioned in the will? The beneficiary designations for each asset should have been made outside of the will (on a beneficiary designation form) and if that was done, those beneficiary designations will override any instructions of the will.

DANDY DON IN OKLAHOMA ([email protected])
 

TXSK

Junior Member
Thanks for the replies. I know it is a confusing situation, but not too bad when broken down to one account at a time, it's just that I then handle that seven times with variations on all.

And yes, I have solicited advice from my regular CPA and general attorney, but I think I may need a specialist for a definitive answer since they are not confident in their answers.

The key decision point right now is probably going to be the question of the tax rate paid by the estate on the distributions (in the case where all siblings disclaim, the disclaimed account goes to the estate). If the rate is 35% as Anteater says, it wont be worth doing. If the rate were the same as an individual persons rate, then it might be worthwhile. I'm still waiting for that answer from the CPA, who is on vacation.

Dandy Don - What I had HOPED for was that a disclaimer, by me alone, would allow it to pass through to my children. That may still be the case with the 'Traditional IRAs' and WILL be advantageous to do. The reality is that the 'Annuity Contract' (which is held in an IRA account) specifies that the disclaiming (or dead) Primary Beneficiary's share splits among the remaining Primary Beneficiaries. If ALL beneficiaries disclaim, then it goes to the estate where the estate pays the tax and then distributes the then cash estate assets according to the instructions of the will. And no, the annuities and IRAs are not mentioned specifically in the will, which is normal since they are designed to bypass probate.
Yes, all accounts have beneficiary designation forms that do override the will (which is why the will does not mention them), but if ALL beneficiaries, primary and contingent, are dead or disclaim, then the assets go to the estate for distribution according to general provisions of the will.

Joe
 

tranquility

Senior Member
Yes, all accounts have beneficiary designation forms that do override the will (which is why the will does not mention them), but if ALL beneficiaries, primary and contingent, are dead or disclaim, then the assets go to the estate for distribution according to general provisions of the will.
Make sure this statement is correct. This will require case law review of both tax and probate law. Although I'm not sure, for some reason I believe a disclaimed asset is disclaimed for all purposes. What this means that if it were to go back into the estate, the person disclaiming can not now take the asset through that route.

I only say this because I made the same argument many years ago in a complex situation. A more senior person shot it down and told me I was incorrect. I was not given the time/freedom to research the question further. The result may have been specific to California or may have been incorrect, I'm just saying a really smart guy who did a lot of work in this area came to a different conclusion.

It would be well worth the expense to have your attorney/accountant research the matter.
 

anteater

Senior Member
...The key decision point right now is probably going to be the question of the tax rate paid by the estate on the distributions (in the case where all siblings disclaim, the disclaimed account goes to the estate). If the rate is 35% as Anteater says, it wont be worth doing. If the rate were the same as an individual persons rate, then it might be worthwhile. I'm still waiting for that answer from the CPA, who is on vacation.....

Joe
Trust me, the marginal rate for trusts and estates is 35% for income over $10,450. Check Form 1041-ES for 2007 here:
http://www.irs.gov/pub/irs-pdf/f1041es.pdf

Someone can correct me here or elaborate, but if the estate is distributing income that it receives, it can take the distributions as deductions on the estate tax return and have the beneficiaries report the income at their presumably lower marginal rates. In outline:

1) Estate receives taxable income.
2) Estate distributes income.
3) Estate completes its income tax return - Form 1041 - with the distributed income as dedcutions.
4) Estate issues K-1's to beneficiaries.
5) Beneficiaries report on personal income tax returns.
 

TXSK

Junior Member
Thanks again Tranquility and Anteater,

I've thought about the situation, that Tranquility brought, up for a while. If I disclaim to IRA, am I also stuck disclaiming the same dollars from the estate? If so, I my situation that could be advantageous since my goal is to get the money to my kids and be taxed at their rate. If I must disclaim at both places, then the estate would then pass the money to my heirs, (desirable) and if , as according to Anteater, the estate can pass the income to the heir via a K-1, I they get the lower personal tax rate of my kids. Viola, I've got what I want, except that my siblings will be in the same boat as me, and they have no need/desire to pass through to their kids.
In the end, I think Tranquility has the best statement about this situation, "This will require case law review of both tax and probate law."
Thanks for your thoughts on this one, I think its time to search out he right attorney to help me with this problem.
Joe Tomberlin
 

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