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Monday, January 26, 2009

No MRD for most IRAs in 2009

In case you hadn't heard already, there is a recently enacted law in which most beneficiaries of an IRA (inherited or otherwise) can choose to NOT take their minimum required distribution (MRD) for calendar year 2009. (There are some exceptions for people who were supposed to take their MRD in 2008 and were postponing it until 2009.)

Note, this law also applies to beneficiaries of ROTH IRAs, 401(a),401(k) and 403(b) plans. The purpose is to help people save money in this dreadful economy. (Although, as a practical matter it seems to be a benefit only to the wealthiest few as poorer beneficiaries will likely have withdraw it anyway. So, the government may have been better off not offering this tax break as it could really use the revenue.)

You should consult with your plan administrator if you have any questions regarding your ability to avoid taking your MRD this year.

Monday, January 19, 2009


On January 9, 2009, Representative Pomeroy introduced a bill, H.R. 436, that will cap the federal estate tax exemption at $3,500,000. A few thoughts on this bill:

1) For individuals with estates over $3.5 million, the tax on the excess will be as follows:
a) There will be a 45% tax on the an estate over $3.5 million, but under $10 million.
b) There will be an additional 5% surcharge on estates over $10 million (this surcharge will be eliminated when the estate hits about $41.5 million)

2) There is no provision for COLA adjustments;

3) The notion of carryover basis is repealed. In other words, we will maintain the common practice of valuing assets at the value they had on the Decedent's date of death. (I won't go into a long diatribe about this other than saying that getting rid of the estate tax and instituting a system of carryover basis coupled with a capital gains tax is a very difficult system to implement mechanically as people often do not maintain good records regarding the basis that they have in property - especially for property held for generations.)

4) There are no provisions for carry over of a decedent's exemption amount to a surviving spouse; and

5) The bill aggressively attacks valuation discounts for minority discounts of non-business assets.

As discussed before, it is highly likely that some form of this bill will pass in which the federal estate tax stabilizes at $3.5 million dollars. As for the other features, those are still open to negotiation.

Monday, January 12, 2009

'Tis the Season to be a Snowbird

Ah, the weather outside is frightful.
And Florida is so delightful.
You've packed up your things to go...
Let it snow, let it snow, let it snow.

Seriously, weather aside, have you ever wondered why so many older wealthy people retire to Florida. Well, maybe this answer will help - a relatively affluent person can buy a second house in Florida with the tax savings ALONE!

Let me give you an example: Let's assume that you have a couple in their 70's with about $4 Million in Assets. They have an IRA of $1 million, brokerage assets of $1,000,000, Life Insurance of $1,000,000, a house worth $600,000 and miscellaneous other assets of $400,000. They are leaving everything to their children.

If this couple died as residents of New Jersey, EVEN WITH adequate estate planning other than a life insurance trust, there would still be a NJ estate tax of about $210,000 on the second to die of the husband and wife.

If this couple died as residents of Pennsylvania, EVEN WITH adequate estate planning other than a life insurance trust, there would still be a PA inheritance tax of about $135,000 on the second to die of the husband and wife. (Note, with a $4 million dollar estate, a small state inheritance tax may be due on the first to die in order to avoid a much larger federal estate tax on the second to die.)

If this couple died as residents of New York, EVEN WITH adequate estate planning other than a life insurance trust, there would still be a NY inheritance tax of about $190,000 on the second to die of the husband and wife.

If this couple died as residents of Florida, then there is ZERO Florida estate or inheritance tax.

Now, factor in the additional benefits. In addition to lower property taxes in Florida, Florida is also the only one of these three states not to have an income tax. (It should be noted though that Pennsylvania does exempt IRA distributions from the state income tax.) So, let's make an additional assumption that this couple lives another 20 years and that they take out about $1 million dollars from the IRA during that time. (I'm not going to get into the time value of money.) This would produce an aggregate state income tax of approximately $70,000 for NY and $65,000 for NJ.

In total, moving to Florida would help save:
  • $275,000 for a NJ resident;
  • $260,000 for a NY resident; and
  • $135,000 for a PA resident.
Now, these savings may not purchase a mansion, but you can certainly find a nice house (especially in this real estate market) with the tax savings from moving. Obviously, the wealthier you are, and the more you have in your IRA, the better the result.

An attorney licensed to practice in Florida plus your home state can help you move down to Florida in a way that will be most cost efficient. This includes preparing the appropriate estate planning documents in Florida, mitigating the necessity for ancillary probate in the your original home state, and properly setting up your other legal documentation to prove that you are a Florida domiciliary.


DISCLAIMER: All the usual disclaimers found elsewhere on this Blog plus a disclaimer that all tax calculations are approximate and made for tax year 2009.