A few weeks ago I wrote a column covering the unique ability that we all have to convert traditional IRAs into Roth IRAs providing a timeline that you can follow when working with your advisors. If you missed that article search my firm’s web site www.sbshlaw.com and click on “Family Legacy Blog” where you can find it.

 Today I’m going to review for you some of the estate planning issues that are affected should you choose to convert a traditional IRA into a Roth IRA. While the question whether to convert is typically a financially driven decision, once that decision is made you should meet with your estate planning attorney to make sure that the converted Roth IRA fits properly into your estate plan.

 Asset Protection

 In Florida IRAs are generally considered to be asset protected by statute. Roth IRAs, however, appear to fall outside of the scope of the statutory definition of what is protected. Federal laws also limit asset protection to Roth IRAs. Before converting to a Roth, if you are in a high risk occupation or should you be involved in an activity or in a lawsuit that merits a close look at what assets are protected, you should meet with your estate planning counsel.

 Beneficiary Designation Forms

 Upon converting to a Roth IRA, your beneficiary designation forms should be reviewed to ensure that they coordinate with your overall estate plan. The preparation of proper beneficiary designations is critical to ensure that each separate share for your beneficiaries allows for the maximum opportunity to achieve tax deferred growth.

 IRA Trusts

 Because of the additional investment in the form of paying upfront taxes on the conversion to a Roth IRA, most clients will be well advised to take the additional step of leaving the Roth IRA into a special protected trust as opposed to outright to their children. An IRA left outright to a beneficiary has limited asset protection in most jurisdictions, while a trust can serve to protect the beneficiary against predators, creditors and divorcing spouses.

 Estate Tax Exemption and GST Planning

 Roth IRAs are generally the best types of assets to leave in continued trusts for your children and grandchildren because of their special income tax free nature.

 Estate Tax Apportionment Issues

 Estate tax apportionment deals with what assets and what shares of your estate pay any estate tax that might become due at the time of your death. Since state death tax exemptions are often different than federal death tax exemptions, this becomes an even larger issue for those that either live or own property in a jurisdiction that has a state death tax.

 Charitable Planning

 For those that incorporate charitable planning into their estate plans, the income tax ramifications from the conversion of a traditional IRA into a Roth IRA merit another close look at how the charitable intent is satisfied.  

These are just a few of the estate planning issues that merit attention when converting a traditional IRA into a Roth IRA. So be sure to include your attorney in the discussion with your CPA and financial planner when deciding to convert a traditional IRA into a Roth IRA.

 ©2009 Craig R. Hersch