IRA Beneficiary
31. Creating Separate Estates Saves Taxes
If Bob and Sue had planned ahead, they could have used both exemptions and saved $2,692,308 in federal estate and income taxes!*
All they had to do is split their $10 million estate into two smaller estates of $5 million each.
When Bob dies, his estate (as shown on the right) uses his $5 million exemption. And when Sue dies later, her estate (as shown on the left) uses her $5 million exemption. The result is that both their taxable estates are reduced to $0, so the full $10 million can go to their loved ones. Total tax savings? $2,692,308! Plus, by using trusts as shown here, they save thousands more in probate costs!
There are other benefits to this planning.
*NOTE: The beneficiaries would receive an income tax deduction for the estate taxes attributable to the IRA. Also, income taxes will eventually have to be paid when money is withdrawn from the IRA (presumably in smaller increments that will incur less tax). But by using both estate tax exemptions, money will not have to be withdrawn now from the IRA to pay the estate taxes. So neither the $942,308 in income taxes or the $1,750,000 in estate taxes would have to be paid when the second spouse dies.