Ask a Lawyer : Chapter 20 - Tax Basics

Saving Taxes on an IRA

Q. Can you explain briefly the options for selecting the beneficiary of my IRA? Naturally, I want to save as much in taxes as I can.

A. If you are interested in saving taxes, you want to stretch out the required payments from your IRA over as long a period as possible. Since the earnings in the IRA are not taxed until distributed, your tax savings will grow if you can minimize the distributions. If you are married, the easiest way to do this is to name your spouse as beneficiary. If he or she is alive at your death, your spouse can roll over your IRA into a new IRA in his or her name and name your children as the beneficiaries. This will start a new payout period based on your spouse’s age, with a third payout period beginning after your children “inherit” the IRA on your spouse’s death. Depending upon the ages of the parties involved, this type of planning can stretch out the payment period for as much as 30 or 40 years after your death.

If you are single, it is to your advantage to name a beneficiary who is younger than yourself. This will allow the beneficiary to further stretch out the payments when he or she “inherits” the IRA on your death.

Answer by Harold Pskowski, BNA Tax Management, Washington DC

Tax Breaks for Business Owners

Q. I’m the owner of a business? I understand that my estate would have to pay taxes on the value of the business if I don’t do anything—but what can I do to lighten the tax load?

A. Congress is sympathetic to the plight of business owners and has created several breaks in the tax code for you. One of these allows your estate to pay the estate tax on the business over as long as 15 years, while paying only a 2% interest rate on the deferred tax. Another allows your executor to reduce the value of the business by as much as $300,000 for estate tax purposes. Both of these tax breaks have complex requirements, and you should not assume that you will automatically qualify.

But you are not limited to these targeted tax-reduction methods. There are a number of other tested estate planning techniques—such as annual gifting and placing your business in a family partnership—that can have the effect of reducing the value of the business in your estate. The successful implementation of these techniques will require the services of an experienced estate planning attorney.

Answer by Harold Pskowski, BNA Tax Management, Washington DC