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  • CFO Magazine

Passing the Bucks

Want to share your nest egg across the generations? A disclaimer gives a surviving spouse the right to play dead so that IRA assets can be transferred to others.

Marie Leone is senior editor of CFO.com.

Heir Tactics

As an example of how an IRA disclaimer might work, consider a
scenario in which a husband dies and his wife inherits $1 million in
aftertax money and an IRA worth $3 million. The IRS’s unlimited
marital deduction allows the wife to inherit everything without paying
estate taxes. But if the wife accepts the full IRA, two things will
happen: she will be forced to take an annual minimum required distribution
(MRD), which will deplete the IRA principal and entail a tax hit, and by accepting
the full $3 million she may overfund her estate and force her heirs to cope with estate- and income-tax payments they might have avoided.

The wife talks to her two adult children and finds that her daughter is doing well
financially but her son could use some help. The wife therefore accepts only $2 million
of the IRA and disclaims the remaining $1 million, which passes to her two children. The
daughter disclaims all of her share, which passes to the next beneficiary named by the
disclaimer, a trust set up for her 14-year-old daughter. (The granddaughter’s trust must
begin accepting the annual MRD immediately, but the withdrawal is small because it is
based on the granddaughter’s life expectancy, so the IRA principal is stretched further.)

Meanwhile, the son, who has twin boys, accepts half of his share and disclaims
the rest, which passes to a trust for his twins. The son begins withdrawing and paying
taxes on the MRDs, getting a useful cash infusion.

By making an IRA disclaimer part of his estate planning, the original IRA owner
was able to stretch that account so that it reached his grandchildren, while providing
financial support to his wife and son along the way. Not a bad way to feed a family on
one nest egg. — M.L.

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