Home' Island Sun : ISN 091815 Contents 37
ISLAND SUN - SEPTEMBER 18, 2015
Arecent client sent me a cover letter with her worksheet
detailing her holdings and what she wanted to accom-
plish in her estate plan. “Since the estate tax exemption
is over $5 million now, I believe that my IRA doesn’t pay any
taxes when I leave it to my children since my total estate is less
than that amount...”
Right. But wrong.
She was right in the sense that her estate is unlikely to pay
any federal estate taxes. She is wrong in the sense that the
income taxes that occur when the IRA balances are withdrawn
will still be paid by the recipient.
This is another instance where people become confused over the difference
between estate taxes and income taxes. Estate taxes are a tax on the value of the
deceased’s balance sheet. The balance sheet is, in essence, one’s total net worth.
Total assets less total liabilities. It is valued as of the date of the deceased’s death. If
the deceased’s net worth exceeds the available estate tax exemption amount, then an
estate tax is imposed.
This is not to be confused with the income taxes, which, as defined, are a tax on
the income statement. Certain types of assets carry with them unrealized ordinary
income that has yet to be taxed but will be upon the decedent’s death, no matter the
value of the decedent’s balance sheet.
Assume, for example, that Teresa dies with a total net worth of $3.5 million,
but included in that net worth is a $600,000 Traditional IRA account (as opposed
to a Roth IRA account) naming her daughter Shannon as the beneficiary. The IRA
becomes an “Inherited IRA” to Shannon. Shannon will be required to take Required
Minimum Distributions (RMDs) each year based upon her age, even if she has not
attained age 70 yet. This is because with Inherited IRAs the recipient must begin tak-
ing RMDs in the year following the account owner’s death, which is calculated on a
“Single Life Table” issued by the IRS.
Assuming that Shannon is aged 52 as of her mother’s death, the divisor is 32.3
according to the table. The calculated RMD is therefore $18,576. ($600,000/32.3).
Shannon must include the $18,576 on her IRS Income Tax Return Form 1040 as
this is taxable income to her even though her mother did not have a taxable estate for
federal estate tax purposes.
In the Internal Revenue Code, Traditional IRAs are known as “Income in Respect
to a Decedent” or “IRD” items, meaning that because they would have been taxable
income to the decedent if she made withdrawals or took distributions, they will also
become taxable income to the decedent’s beneficiaries. Other common IRD items
include annuities and pension plan accounts. When a beneficiary inherits IRD items,
they can expect to pay income taxes on withdrawals. Some IRD assets, like Traditional
IRAs are commonly fully taxable, while some – like annuities – might include a return
of principal that are not taxable.
What about capital gains? Are capital gains also taxed? This depends on who
owned the asset that had an unrealized gain at the time of the decedent’s death and
whether that asset enjoyed a “step-up in tax cost basis.” The most common example is
what you find inside of a regular brokerage account and is best explained by example.
Suppose that Chandler owned shares of ABC Company that he purchased for
$100,000 but at the time of his death were worth $1,100,000. If Chandler sold the
shares the day before his death, he would realize a $1,000,000 capital gain and pay
capital gains tax on his income tax return. If instead Chandler died with the ABC
shares and left them to his son, Dexter, then Dexter gets a new tax cost basis valued as
of his father’s date of death. Assume that value is $1,100,000. If Dexter sells the ABC
shares the day following his father’s death for that same amount, there is no capital
gains tax to pay.
These laws can be quite confusing so it is always best to consult with your legal, tax
and financial team before making decisions relative to these issues.
©2015 Craig R. Hersch. Learn more at www.sbshlaw.com.
From page 9
damage assessment, and search-and-rescue techniques.
They also are active with the training of the Sanibel Power and Sail Squadron in
their SEARAT activities for boat rescue and emergency response on the water.
The Sanibel-Captiva Rotary meets at 7 a.m., Friday mornings at The
Community House, 2173 Periwinkle Way. Guests are always welcomed.
Does The $5.43 Million Estate Tax
Exemption Mean IRAs
Pass Along To Heirs Tax Free?
by Craig R. Hersch, Florida Bar Board Certified
Wills, Trusts & Estates Attorney; CPA
Lee County can roll out an even big-
ger welcome mat to visitors at its
new certified welcome centers.
In correlation with a new Visit Florida
program, the Lee County Visitor &
Convention Bureau’s (VCB) Welcome
Center at the Southwest Florida
International Airport (RSW), the welcome
center at the Edison & Ford Winter
Estates, and the welcome center at The
Sanibel-Captiva Islands Chamber of
Commerce are officially Florida Certified
Tourism Information Centers (CTIC).
The Visit Florida Certified Tourism
Information Centers (CTICs) Program
brings Visit Florida recognition to visitor
services facilities around the state, pro-
viding these facilities and their staff with
benefits that enable successful promotion
of travel to and throughout Florida.
“Visit Florida is not looking to fran-
chise visitor centers,” said David Dodd,
Visit Florida vice-president of visitor ser-
vices. “The Visit Florida Certified Tourism
Information Center Program is focused
on presenting a consistent Florida mes-
sage and a quality Florida experience for
all visitors to the Sunshine State.”
To become an official Florida Certified
Tourism Information Center, visitor cen-
ters must meet requirements specified
by Visit Florida, such as: centers must be
a Visit Florida Partner, centers must be
open year-round at a minimum of five
days per week, centers must be located in
a convenient and accessible location for
the ease of travelers, and centers must
have access to parking and restroom
facilities to accommodate visitors includ-
ing persons with disabilities.
“We are very happy to be included in
this prestigious roster of new Visit Florida
CTICs from across the state. With our
team of volunteer tourism ambassadors
greeting nearly 300,000 vacationers
annually, this provides an extra layer of
service excellence to our visitors,” Judi
Durant, director of VCB Visitor Services
said. “It is a pleasure to be recognized as
an official CTIC welcome center in this
program with our Lee County partners,
the Edison Ford & Winter Estates and
the Sanibel-Captiva Islands Chamber of
All Florida Certified Tourism
Information Centers receive additional
benefits from the program, including:
a brochure display at all Visit Florida
Welcome Centers, vacation guides,
Florida state maps, certification signage,
and access to a state of Florida network
with other tourism professionals. In addi-
tion, Statewide Information Specialist
Certification is being offered to all
employees at a Florida Certified Tourism
Visit www.fortmyers-sanibel.com for
information on The Beaches of Fort
Myers & Sanibel.
703 Tarpon Bay Rd, Sanibel, FL (239) 472-3022
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