Using Retirement Plans for Estate Planning

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Paul Sundin, CPA

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Very often retirement gets overlooked in the estate planning process. Many people understand that retirement plans will pass directly to the beneficiary, but they failed to remember that it is still included in a persons estate.

But all is not lost. There are a handful of strategies that people can use to with retirement plans that can actually decrease a persons estate.

In this post we’re going to take a look at some of the strategies that can be used with retirement planning to lower your estate.

But first things first. Let’s take a look at the main goals of retirement or estate planning:

  1. Value the your assets as low as possible
  2. Two exclude assets from your state but maintain some sort of control

Using a Self-Directed Roth IRA

This strategy was made popular by Peter Thiel. You can read more about his structure here.

In substance here’s how it works. You have a 401(k) a Roth 401(k) that is set up with a self-directed custodian. There are many of these custodians and they’re easy to find online.

The first step is to transfer an existing Roth into the self-directed Roth account. If you don’t have a Roth, then you can convert a traditional IRA into a Roth and pay the tax. But don’t worry, the amount you convert will be rather small and so it won’t create too big of a tax hit.

So let’s assume you get $10,000 into a Roth. You they need to set up a c Corp. The self-directed IRA will contribute the $10,000 into the corporate bank account as for the initial capitalization of the entity. He’s self-directed Roth will become 100% owner in the C corporation.

Once you capitalize the company since it is a start up there really isn’t any assets or liabilities. One downside of the C Corp. though is that you may have losses in the early years and these losses will be contained within the Secour and will not flow back to you personally.

So the C Corp. then becomes a very profitable entity and it is sold for $10 million at some point down the road. Since the C Corp. is 100% owned by the self-directed Roth IRA all the proceeds will flow back into the self-directed IRA and will be excluded from taxation assuming all of the rules Roth rules are met.

But let’s take this one step further. Let’s assume you have a 18-year-old child that you were starting a business with. Let’s assume that child is flipping burgers at McDonald’s and makes $6000 in a given year. Because the child has earned income, you can include make a contribution to a Roth IRA of the $6000. The child doesn’t even have to file a tax return. 

That money is then contributed into a new corporation. So you and your child may each contribute $6000 from a Roth IRA. Since you are 50-50 owners you’ve just reduced your estate by $5 million. Not such a bad deal.

Defined benefit plan for cash balance plan

Great strategy for high self-employed person witness define benefit plans allow for very large contributions. These are qualified plan a task adoptable generally excluded from liability and bankruptcy. However, they are included in someone’s estate. Here is where the estate planning comes into play. 

Let’s assume you have a business with no employees other than yourself. It is an s Corp. let’s assume u pay yourself normally 200,000 a year. Let’s also assume that you can make a retirement contribution to the plan of $200,000. You get a tax deduction for the $200,000 but it is still included in your estate. 

So let’s then assume you hire your two children to work for the company in your place and you pay them each 100,000. Let’s also assume that you can make a retirement contribution of $100,000 to each of them. 

You have just reduced your estate by $400,000. The salaries paid to your kids is hopefully taxed at a lower rate than yours. The defined benefit plan will be rolled over into an IRa for your kids once the company is sold or dissolved. 

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Estate CPA

Gilbert, AZ