Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Tuesday, June 28, 2011

Tax-Free Inheritance Using Roth IRAs

Roth-ira Two changes to the tax code now give investors with large 401(k) accounts the ability to give their grandchildren a tax-free inheritance of $400 million or more. Congress created this estate-tax break in two steps last year:

First Congress lifted a $100,000 income restriction on who can convert a 401(k) or IRA to a Roth IRA, allowing even the wealthiest investors to convert. Then late in the year, it raised the generation-skipping transfer tax exemption (GST) to $5 million until 2013. The exemption was previously $3.5 million, and was scheduled to drop to $1 million this year before Congress stepped in.

Converting to a Roth IRA is not for everyone though, as taxpayers must pay income taxes on assets moved to the account. Under Roth rules, assets left in the account can grow tax free, but the heir must take minimum distributions that can be stretched over a lifetime.

With the new GST exemption, the estate planning benefits that can be wrung out of a Roth are eye-popping. Consider an extreme case: A wealthy individual converts a large 401(k) account to a Roth IRA and names a grandchild as the beneficiary. The grandchild, at age 1, inherits the Roth, whose assets have grown to $5 million. Because of the new $5 million GST, the Roth assets would not be subject to estate tax or generation-skipping transfer tax.

Karen Hube, The tax law that could make your grandchildren super-rich,The Washington Post, Jun. 25, 2011.

Special thanks to Jim Hillhouse (Wealth Counsel) for bringing this article to my attention.


Estate Planning - Generally, Estate Tax, Generation-Skipping Transfer Tax | Permalink

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