Leaving a pension to a non-spouse beneficiary
Q I am in a quandary. A representative from my main mutual-fund provider told me my traditional pension benefits are like annuities. So upon my demise, there is a taxable event to my estate, because the person designated to receive survivor benefits from my pension is not my spouse. But an IRS representative contradicted him, indicating ordinary pension benefits do not receive special tax treatment. A private attorney agreed. Finally, a second IRS agent said the survivor benefit would be taxed as part of the estate. My company's benefits office came down on the same side as the second IRS representative. Who is correct? And how do you determine which answer is correct when you get totally contradictory advice?
Name withheld, via e-mail
A Your mutual-fund provider, benefits-office representative, and the second IRS agent are correct, says Ed Slott, a CPA based in Rockville Centre, N.Y.
If the pension benefit were passed along to your wife, the value of the residual benefit would not be subject to a special estate tax, because of the marital deduction given a surviving spouse.
In this case, however, the survivor benefit would become part of the estate, since it would be earmarked to a non-spouse. The value of the benefit, which would be included within the estate, would be a "computed value, based on the projected lifespan of the heir," Mr. Slott says.
Your situation illustrates how important it is to have regular access to a financial professional, such as a lawyer or tax accountant.
Q I am a big fan of the tax-free growth of the Roth IRA. I have a long-time horizon until retirement, and want to convert my traditional IRAs into Roth IRAs. Paying the taxes on the conversion isn't a worry. But I am kind of worried that the government will change the rules when it eventually realizes the Roth costs too much in lost revenue. Is this a legitimate concern for young investors?
S.P., via e-mail
A "There is little talk under way about taking away the tax benefits of the Roth IRA," says Gary Schatsky, a fee-only financial planner in New York. In fact, most of the discussion in Washington is about "expanding" the package. The Roth IRA is a great investment vehicle for small savers, he says. It would be foolish to halt your investments in the product because of fears about the future.
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