Years ago, an IRS attorney explained in a speech that the "confiscatory" tax treatment of retirement-plan and IRA money upon death was "reasonable."
"Look," he said, "the government never set up these programs as a tool for creating estates that could be passed on to heirs. The intent of the legislation is to make it easier for people to provide for their own retirement income needs -- and nothing more."
That seems reasonable. The tax savings alone, over a 30-year period, generates what amounts to three times more in a retirement account over what anyone would have accumulated after starting with the same annual amount, saving what was left after taxes, and paying taxes on whatever was earned on what was left after taxes.
For example, anyone investing an annual $10,000 tax-deductible retirement plan contribution for 30 years and earning 10 percent would accumulate $1,645,000.
The same person, starting with $10,000 but paying a marginal rate of 35 percent in federal and state income taxes combined, would be investing $6,500 after taxes.
Earning 10 percent gross would be reduced each year by about 30 percent in state and federal taxes, because mutual funds with turnover will trigger capital gains taxes at the 25 percent (state and federal) level each year.
Net annual gain might be closer to 6.5 percent considering that taxable money gets invested less successfully because tax considerations stand in the way of pure investment decisions.
The after-tax money, then, accumulates to only $515,000. In both cases, we started with the same $10,000 per year and had the same gross investment return of 10 percent.
So, the deductible contributions and tax-free compounding contribute what amounts to a government subsidy that produces a retirement nest-egg three times larger than we otherwise would have had.
If funding retirement was the engine driving this welfare for the middle class, it seems reasonable that we shouldn't be allowed to use these assets to fund a family dynasty.
In the face of this legislative intent, we have Ed Slott's book "Parlay Your IRA into a Family Fortune." In general, tax legislation reminds me of what it's like to place a thumb on a blob of mercury. As Slott's book illustrates, it's only a matter of time before that legislative intent is diluted by the myriad attempts to turn what some see as lemons into lemonade.
In 2006, a variety of new tax laws and revenue rulings have opened the door to different opportunities for saving taxes and passing retirement assets on to heirs.
Bear in mind that any spouse, as the named beneficiary of a retirement plan, receives the money as a tax-free rollover.
Anything beyond making your spouse the beneficiary, however, opens the door to a world of immediate taxation. Back when the estate tax impacted smaller estates, the IRA money for many heirs would have been taxed at regular income tax rates, and what was left would have been taxed at the highest marginal estate tax rate, or 55 percent. For all practical purposes, the total tax on retirement money for nonspousal heirs could be as high as 80 percent.
Apparently, a trust can now be established that makes the spouse the beneficiary for only a specific amount of annual income generated by the IRA rollover at death. The remainder can go to other beneficiaries.
A starting point for the process is to turn current IRAs into Roth IRAs, which means paying the taxes today in exchange for a tax-free windfall for grandchildren as beneficiaries 50 years later.
The bible for most basic decision-making is Twila Slesnick's "IRA, 401(k)'s and Other Retirement Plans" That book lays out the fundamentals and everyone should own a copy. By comparison, Slott's book outlines how to "work the system."
Buying his book competes with the purchase of that bumper sticker for your motor home that says "We're spending our children's inheritance."