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Roth Conversions and What You Need To Know Beyond the
Numbers
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Estate Tax Apportionment Issues: Generally, estate
taxes should be apportioned away from the Roth IRAs to allow the Roth IRA
to continue to grow on income tax-free basis. Because of the unique
characteristics of a Roth IRA, over a period of years this will add
significant value to the beneficiaries.
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Recharacterizations: Inherent in the Roth conversion is
the ability to recharacterize the Roth back to a traditional IRA. Does the
client’s durable financial power of attorney provide the agent with the
right to make any and all tax elections including an election to
recharacterize the Roth IRA? The ability to recharacterize extends beyond
a client’s death and is transferred to the client’s personal
representative following death. Thus, both a client’s IRA trust and last
will should be modified to provide for the recharacterization decision, if
such provisions are not already in these documents & such modification is
appropriate for the client’s planning circumstances.
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Charitable Planning: In the year which a client
converts to a Roth IRA, the client is often looking for additional income
tax shelters. This is where charitable planning can be very handy. Some
clients should consider creating a charitable lead trust “CLT” in the year
of conversion. A CLT structured as a grantor trust may be designed to
provide an income tax deduction equal to 100% of the property transferred
into the trust. This can be a very valuable deduction in the year in which
income is increased by a Roth conversion. Note that income tax deduction
limitations may still apply. Other clients may consider the charitable
remainder trust (CRT). The CRT can also play an important role in
minimizing income tax.
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