IRA distribution flowchart

This flowchart (PDF) is a handy reference for the rules that relate to distributions from IRAs to the owner (participant) and to beneficiaries.

The Medicare surtax on trusts and estates

In the Health Care Education and Reconcilation Act of 2010, Congress adopted a new 3.8% surtax to provide additional funding to the Medicare program. Codified at 26 USC 1411(a)(2), the surtax will generally apply only to investment income over $200,000 (single taxpayer) or $250,000 (married couple). Importantly for our probate and trust clients, however, the surtax will also be potentially imposed on trusts and estates, at a much lower income level.

The surtax is separate from the estate tax, which is currently imposed only on gross estates of over $5 million per person. It is an addition to the income tax which is imposed on trusts and estates.

The surtax will apply only to tax years beginning after January 1, 2013. For some estates and trusts, electing a fiscal year that ends in October or November could delay the imposition of this surtax for the first year.

The calculation could be a bit tricky. The statute provides that the 3.8% is applied to the lesser of

• the estate or trust's adjusted gross income over $7,500 or 
• the estate or trust's "undistributed net income."

(For some reason, many authors have said that the threshold is $11,600. A review of the statute's cross-reference to 26 USC 1(e), however, shows that it is $7,500.)

The estate or trust would normally avoid this surtax by distributing net investment income to the intended beneficiary. It should be noted, however, that this step could lead to:

• in a high-value estate or trust, the investment income bringing a recipient over the personal investment income threshold, in which event he will be personally responsible for paying the 3.8% amount, or 
• making the distribution available to creditors in the event that the recipient is experiencing financial difficulties.

For some trust beneficiaries, keeping net income within the trust is a good way of keeping the money out of the hands of the beneficiary's creditors, with a good spendthrift clause in the document. That protection will now have to be balanced against the potential imposition of the 3.8% surtax.

New DPOA requirements now in effect

A reminder: The new requirements for durable powers of attorney that we wrote about here went into effect for all POAs executed after October 1, 2012. Although a POA executed before that date is not subject to the requirement, it would be a good idea to update the forms, since it can be predicted that banks, financial institutions, and other custodians of funds will insist on having that language in place before they will accept a form.