Maryanov Madsen Gordon Campbell, Certified Public Accountants

What to do about taxes on 'hot assets'

Howard Gordon
Special to The Desert Sun
March 7, 2007

Accumulating an estate will be much easier if you can minimize the tax burden.

In my column of Jan. 10, I recounted the discussion I had with my 19-year-old grandson in which I advised that if he put $2,800 in a Roth IRA every year for six years and did nothing else, that he could accumulate $2 million, tax free, by the time he was 65. I am happy to report that he decided to do it.

Although this plan will work well for him, many of us have accumulated savings through regular IRA's, 401k plans and other similar tax-deferred vehicles.

The problem with these is that they require us to start withdrawing money when we reach age 70½ (whether we need it or not), and these withdrawals are then taxed at ordinary income rates. Furthermore, unlike with most other assets, whoever inherits these deferred income assets will have to pay the income tax on them whenever they take withdrawals and, in some cases, will also be required to take withdrawals starting immediately.

When you pass away, most assets receive what is called a "stepped-up basis."

For instance, if you owned a stock that cost $10 but was worth $100 at your death, there would be no income tax owed if the stock is sold at the stepped-up value of $100. "Hot assets" such as regular IRA's etc. do not get a stepped-up basis and will be taxed at regular income tax rates when withdrawals are made after your death.

However, if your beneficiaries don't need the funds, they can avoid the high income tax rates by using charitable donations or bequests to charitable remainder trusts (CRTs).

One solution still available in the 2007 tax year for those over 70 is a law that allows you to directly roll all or part of your IRA, up to $100,000, directly over to a charity. The amount you contribute is not included in your income as a withdrawal, which means it alone will not put you in the Alternative Minimum Tax (AMT) nor will your medical or other miscellaneous deductions be reduced because of increased gross income. In addition, you will not be subject to the limitations for charitable deductions with this direct rollover contribution.

Of course, since the amount is not included in your income and has never been taxed, you will not receive a charitable deduction. It does however allow you to make a large contribution and at the same time reduce the balance in your IRA. Unfortunately, as things stand now, this law will expire in 2007.

Another solution is to create a Charitable Remainder Trust (CRT ) and bequest all or part of your IRA to the CRT. The ultimate beneficiary of the CRT will be the charity of your choice. The income beneficiary of the CRT could be your spouse or children or whoever you choose. By using various provisions allowed by CRT rules and carefully choosing the assets which are purchased, income can be regulated so that if a spouse or child doesn't need the funds immediately, they could postpone the flow of income until it is needed at a later date. This is a benefit not available in a regular IRA rollover. Of course, the charity gets the remainder of the trust when the income beneficiary dies - a win-win all around.

As with all complicated solutions, you shouldn't try this yourself and professional tax and trust advice should definitely be sought.

is a Certified Public Accountant and retired managing partner of Maryanov, Madsen, Gordon and Campbell. He can be heard on News Talk 920 AM on The Desert Today on Tuesday mornings at 8:15, and as host of Loopholes on Wednesday evenings at 6:00.

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