How do I reduce the taxes on my estate?

How do I reduce the taxes on my estate?

Q.: To lessen the death tax on my estate, if I put my Roth IRA in an irrevocable trust now and after my spouse and I die four years later, do my children afterward have six years or 10 years to invest all the money before they must dispose of the Roth money from the trust under the new rules of the 2019 SECURE Act?

I understand that all the money taken from the trust would be at least federal tax-free for my children. Thanks for your help!


A.: John, you cannot put a Roth IRA in a trust while you are alive. You can move the assets in the Roth IRA out of the Roth IRA and then put those assets into the trust but trusts can only own Roth IRAs as Inherited Roth IRAs. Assuming you are over 59 ½ and it has been more than five years since you opened your first Roth IRA, neither the distribution from the Roth nor the subsequent transfer to the trust would generate an income tax liability.

Read: How to make sure your spouse gets your retirement savings when you die

If the trust is irrevocable, you could either pay gift taxes or use some of your lifetime unified credit. Either way, upon your passing, the assets in the trust would be available to heirs per the terms of the trust. When the assets placed in an irrevocable trust are considered a gift to the trust, at your death, the assets in the trust would pass without federal estate taxes.

However, most people do not need to consider a gift to a trust to avoid estate taxes. Most estates are not subject to federal estate taxes. With some planning, up to $11,700,000 of one’s assets ($23,400,000 for a couple) can pass free of federal estate taxes in 2021.

However, while estate and gift taxes are not a concern for most people, almost everyone has to deal with income taxes. From an income tax standpoint, moving money out of your Roth into a trust during your lifetime is not optimal. By putting the assets in a trust, those funds are subject to taxes on earnings. If they are taxed at trust rates, the taxes can be expensive.

Read: How to make an estate plan for your digital assets

For 2021, the maximum 37% marginal tax bracket for a couple kicks in at taxable income exceeding $628,300 but for certain trust arrangements, the 37% bracket starts at a mere $13,050 and an additional 3.8% Net Investment Income Tax can also apply. By contrast, if you are over 59½ and it has been more than five years since you opened your first Roth IRA, neither earnings nor distributions from a Roth are taxable at all.

Roth IRA funds transfer at death via beneficiary designations. Most people name their spouse as beneficiary. If you do that, your wife can take your Roth IRA as her own Roth IRA when you die, do as she pleases with it, and she will not be subject to Required Minimum Distributions (RMD) during her lifetime. This lets the account continue to grow tax-free. Upon her death, the designated beneficiary will have 10 years from the year she passed to empty the Roth account. This is the case whether your wife names your children or a trust as her beneficiary.

If you leave the Roth to anyone other than your spouse, including a trust, that nonspouse beneficiary will have 10 years from your death to empty the Roth account, unless an exception applies. You should discuss the matter with your estate planning attorney and other advisers.

If you have a question for Dan, please email him with “MarketWatch Q&A” on the subject line.

Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo serving clients nationwide but with offices in Orlando, Melbourne, and Tampa Florida. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some questions are edited for brevity.

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