IRD Begets ITRD, the “Other Death Tax”

Last month I presented a Webinar on taxation basics for gift planners.  Somewhat to my own surprise, when I was preparing the accompanying paper, I found myself covering the topic of income in respect of a decedent (IRD) in the same section as the topic of estate taxes. It’s now several weeks later, and I remain convinced I made the right choice.

Technically, because IRD is indeed a form of ordinary income, the tax paid is a form of income tax. You could call it income tax in respect of a decedent (ITRD). Still, it’s the “in respect of a decedent” aspect that makes ITRD seem more like a death tax, such as an estate or inheritance tax.
Death Taxes Estate Planning

There’s a lot of fuss and focus this year on what may happen to the federal estate tax starting next year and how any revisions will affect charitable giving. Yet regardless of how the law may change, the estate tax will continue to be something that only fairly wealthy donors will need to think about.

By contrast, ITRD is much more of a tax on the average Jo(e). When, due to the death of one individual, another individual becomes the beneficiary of an IRD asset or arrangement (a qualified retirement plan account, for example), he or she will need to start paying income tax as soon as distributions begin.

When doing estate planning, the typical donor deciding how to provide for surviving beneficiaries needs to keep this in mind. In appropriate circumstances, donors should leave IRD assets to a charity, which, as a tax exempt entity, will pay no ITRD on what it receives.  Other types of assets can then be left to individuals. Of course, when IRD assets are left to a charity, they also escape estate tax.

Moreover, fuss and focus are quite properly directed currently to what will happen to income tax rates come 2013. To the extent they increase, the case for leaving IRD assets to charity upon death will only become stronger. And the number of people to whom charities will need to carry this message will be much greater than the number of people who will have any cause to worry about other types of death taxes.

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