Retirement Accounts in the Estate: The Inclusion Problem, IRD, and 12 Planning Levers

The most expensive misconception in retirement planning is that a tax-deferred account gets any of its favorable treatment carried past the owner's death. It does not. On the day you die, every dollar of your Traditional 401(k), Traditional IRA, Roth IRA, 403(b), governmental 457(b), SEP, SIMPLE, and inherited-IRA-you-are-still-holding is added to your gross estate at its date-of-death fair market value under Internal Revenue Code §2039.^[1] There is no discount for the embedded income tax the Traditional accounts owe. There is no shelter for tax-deferred growth. The rate schedule you have been outrunning during life ends the day you stop breathing, and every share, bond, and cash unit inside the wrapper is measured against your remaining estate-tax exemption.

That is only the first tax. The Traditional accounts — the ones whose contributions were pretax and whose growth was tax-deferred — carry a second, separate tax exposure called income in respect of a decedent, or IRD, under IRC §691.^[2] Unlike a taxable brokerage account, an IRD asset does not get the §1014 step-up in basis on inheritance. Your zero-basis Traditional IRA passes to your beneficiary at zero basis. When they take the money out — and the SECURE Act's 10-year rule now forces most non-spouse beneficiaries to take it out fast^[3] — they owe ordinary income tax on every dollar at their marginal rate, on top of whatever federal or state estate tax the account already generated. This is the retirement-account double tax, and for taxable estates it is one of the most expensive tax stacks in the entire Code.

This guide is the one your CFP should have handed you when your accounts crossed the two-comma line. It covers the exact statutory mechanics of inclusion, the IRD problem and the §691(c) partial fix, the July 2024 final regulations on the 10-year rule, the four Eligible Designated Beneficiary carve-outs, the see-through trust regime, and twelve concrete planning levers — from Roth conversions and QCDs to charitable beneficiary designations, spousal rollovers, ILIT-funded estate-tax liquidity, and the retirement-plan bypass trust. Three worked case studies at $6 million, $12 million, and $28 million net-worth levels put dollar amounts on the choices. When you are ready to model your own numbers, the CalcLeap estate tax calculator and inherited IRA RMD calculator handle the arithmetic against 2026 exemptions and rates.

1. §2039: retirement accounts are fully in the taxable estate

IRC §2039 is the statute that pulls retirement assets into the gross estate. Its title — "Annuities" — undersells its scope. The regulation at Treas. Reg. §20.2039-1 makes clear that §2039 reaches "annuities and other payments" from any employer plan, individual retirement account, or contractual arrangement under which the decedent had a right to receive periodic payments during life. Every 401(k), 403(b), 457(b), pension, SEP-IRA, SIMPLE IRA, Traditional IRA, Roth IRA, Solo 401(k), Keogh plan, deferred compensation arrangement, and non-qualified §457(f) plan is a §2039 asset. The one carve-out is a genuine "pure life" annuity with no death benefit and no survivor rights — a category so rare in retirement planning that it is not worth cataloguing.

The valuation rule is unforgiving: fair market value on the date of death (or the alternate valuation date, six months later, if elected under §2032). No discount for embedded income tax. No discount for the illiquidity of pension rights. No discount for restrictions on employer plan distributions. If your 401(k) balance shows $2,340,000 on the trustee's death-day statement, $2,340,000 goes on Form 706, Schedule I.^[4]

Two consequences follow. First, the retirement account counts against your federal estate tax exemption dollar-for-dollar. In 2026 the federal exemption is $15 million per individual and $30 million per married couple, made permanent by the One Big Beautiful Bill Act (OBBBA) signed July 4, 2025.^[5] Second, in the twelve states plus DC that impose their own estate tax at exemptions dramatically below the federal level, retirement accounts often push a middle-market estate into taxable range even when non-retirement assets alone would have been safe.

State exemptions as of TY2026 filing. Federal exemption $15,000,000 per decedent, permanent under OBBBA §70106.^[5] See the state estate tax field guide for detailed mechanics.

2. IRC §691: the IRD problem and why Traditional accounts get taxed twice

Now for the second tax. When you inherit a taxable brokerage account, you get the §1014 step-up in basis: the beneficiary's basis is the date-of-death fair market value, so if you sell the day after inheritance the capital gain is essentially zero. This "step-up" is a massive planning subsidy that erases decades of unrealized appreciation.

Traditional retirement accounts do not get it. IRC §1014(c) explicitly excludes "income in respect of a decedent" from the step-up regime, and IRC §691 defines IRD as income the decedent had a right to receive but had not yet included in gross income before death.^[2] The paradigmatic IRD assets are:

• Traditional IRAs, 401(k)s, 403(b)s, 457(b)s, SEPs, and SIMPLEs — the pretax dollars and all deferred earnings
• Unpaid installment-sale receivables under IRC §453
• Nonqualified deferred compensation (§409A NQDC), including SERPs and elective deferrals
• Accrued but unpaid interest on any account (Series I Bonds, CDs, etc.) where the decedent had elected accrual-basis taxation
• The undistributed portion of an annuity contract
• Deferred sales commissions, deferred bonuses, deferred royalties, and any other income the decedent had earned but not received

When a beneficiary receives IRD, they inherit the decedent's basis (typically zero for a Traditional IRA) and pay ordinary income tax on the full amount at their own marginal rate. There is no capital-gains treatment available. If the beneficiary is in a 35% federal bracket in a 9.3% state, every distributed dollar of Traditional-IRA IRD costs them roughly 44 cents in combined income tax — and that is after the account has already been included in the decedent's estate at 100% of its face value under §2039.

3. The §691(c) deduction: a partial (and often-missed) fix

Congress recognized the double-tax problem in 1942 when it enacted what is now IRC §691(c). The deduction is not a full offset — it does not eliminate the double tax — but it materially reduces the income-tax bill on inherited IRD.

The mechanic, spelled out in Treas. Reg. §1.691(c)-1, is this: compute the decedent's federal estate tax twice. Once with all assets in the estate as filed. Once again with the IRD asset (typically the entire Traditional IRA or 401(k) balance) removed. The difference — the incremental federal estate tax attributable to the IRD — becomes a miscellaneous itemized deduction that the IRD-recipient beneficiary can claim on Schedule A in the year they include the IRD in gross income.^[7]

Two rules save the §691(c) deduction from being crippled by post-2018 tax law. First, it is expressly exempt from the §67(a) 2% floor on miscellaneous itemized deductions — always has been. Second, and more important, it is expressly exempt from the §67(g) suspension of miscellaneous itemized deductions enacted by the Tax Cuts and Jobs Act — the same TCJA that OBBBA has now made permanent. Both statutes preserve §691(c) as an above-the-2%-floor deduction that survives the miscellaneous-deduction suspension. This is unusual; almost every other 2%-floor deduction is dead through at least 2026.

Two limits keep the §691(c) fix modest. First, it is federal only — no state analogue for the state estate tax portion. Second, if the estate paid no federal estate tax (because the total estate was under the exemption), there is no §691(c) deduction, even if the estate paid state estate tax. That means the beneficiaries of a $12 million Illinois estate with a Traditional IRA get no §691(c) deduction against the $700,000+ of Illinois estate tax that IRA generated — because the federal estate tax on that estate was zero.

Third practical issue: the §691(c) deduction is claimed in the year of income inclusion, not in the year of death. If the beneficiary spreads the 10-year distributions over multiple tax years, the deduction is prorated across those years in the same proportion. Many CPAs miss this pro-ration, and IRA custodians almost never proactively surface the §691(c) available amount. If you are a beneficiary of a taxable estate that paid federal estate tax and included Traditional IRA balances, ask your CPA specifically about §691(c) — the deduction is real, sometimes six figures, and often overlooked.

4. The SECURE Act 10-year rule and the July 2024 final regs

Before the SECURE Act of 2019, a non-spouse beneficiary who inherited a Traditional or Roth IRA could stretch distributions over their own life expectancy, using the IRS single life expectancy table.^[8] A 30-year-old inheriting a $500,000 Traditional IRA from a parent could spread the tax over 53+ years, keeping annual RMDs small, keeping their marginal rate low, and letting the account grow tax-deferred for decades. This "stretch IRA" was one of the most valuable estate-planning benefits in the Code.

The SECURE Act killed most of it. For deaths after December 31, 2019, IRC §401(a)(9)(H) requires most non-spouse designated beneficiaries to distribute the entire inherited account by the end of the tenth calendar year following the year of death. For a beneficiary in the 32% federal bracket, this compresses distributions that would have spanned 40+ years into 10 — often pushing the beneficiary into higher marginal brackets exactly when their earnings are also peaking.

The exact operating rules were unsettled for nearly five years. In February 2022, the IRS issued proposed regulations that took an aggressive position: if the decedent died on or after their required beginning date (RBD, generally April 1 following the year they turned 73 in 2026), the non-spouse beneficiary must take annual RMDs in years 1–9 AND empty the account by year 10 — a "10-year rule with an annual RMD overlay." Advisors and taxpayers argued this contradicted congressional intent, and the IRS repeatedly waived enforcement (Notices 2022-53, 2023-54, 2024-35).^[9]

On July 19, 2024, Treasury and the IRS finalized the regulations (TD 10001). The final rules confirmed the aggressive position: for deaths on or after the RBD, annual RMDs ARE required in years 1–9, calculated using the beneficiary's single life expectancy factor with the standard subtract-one method. Beginning in 2025, missed RMDs face a 25% excise tax under §4974 (reducible to 10% if corrected timely under §4974(e)).^[3]

Per Treas. Reg. §1.401(a)(9)-5 and the July 19, 2024 final regs (TD 10001). RBD = April 1 of the calendar year after the participant reaches age 73 (age 75 for participants born in 1960 or later, per SECURE 2.0 §107).^[3]

5. Eligible Designated Beneficiaries: the four surviving-stretch categories

Under IRC §401(a)(9)(E)(ii) as amended by the SECURE Act, five categories of "Eligible Designated Beneficiary" (EDB) can still use life expectancy — the pre-SECURE stretch, in narrower form:

• Surviving spouse — full pre-SECURE stretch, PLUS the unique spousal rollover election under IRC §408(d)(3)(C) and §402(c)(9) that treats the inherited account as if the spouse had always owned it. This is usually the correct move.
• Minor child of the decedent — life expectancy stretch until the child reaches the age of majority (defined by the final regs as age 21 uniformly, not state-by-state), then the 10-year clock starts and the account must empty by age 31. A minor grandchild does NOT qualify unless the parent has also predeceased.
• Disabled individual — as defined in IRC §72(m)(7), meaning unable to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment expected to result in death or of long duration. Life expectancy for the beneficiary's lifetime.
• Chronically ill individual — as defined in IRC §7702B(c)(2), meaning certified by a licensed health-care practitioner as unable to perform at least two activities of daily living for at least 90 days, or as requiring substantial supervision due to severe cognitive impairment. Life expectancy stretch for lifetime.
• Beneficiary not more than 10 years younger than the decedent — the "siblings and old friends" category. Life expectancy for lifetime. This is why a 68-year-old inheriting from a 72-year-old sibling can still stretch; a 40-year-old inheriting from that same 72-year-old sibling cannot.

An EDB's death mid-stretch triggers the 10-year rule for whoever inherits from them. So a 60-year-old spouse who inherits and rolls over, then dies at 80 with the child as beneficiary, forces the child into the 10-year rule from year 80 forward — the stretch does not compound across generations.

6. Spousal rollover: the single most powerful election

A surviving spouse who is the sole primary beneficiary has options that no other beneficiary has. Under IRC §408(d)(3)(C) and §402(c)(9), the spouse can:

• Roll over the inherited account into their own IRA — direct trustee-to-trustee transfer, 60-day rollover, or simply by failing to take an inherited-IRA RMD (the constructive election). Once rolled over, the account is treated as if the spouse had always owned it: RMD clock starts at the spouse's own age 73/75, the spouse can name a fresh beneficiary who gets their own 10-year clock at the spouse's death, and Roth accounts held for 5 years by the decedent inherit the 5-year rule (which by then usually is met).
• Remain as beneficiary under the inherited account rules, treating the decedent's RMD schedule as if it were still running. This is useful when the surviving spouse is under 59½ and would face a §72(t) 10% early-withdrawal penalty if the assets were in their own IRA — as beneficiary, the §72(t)(2)(A)(ii) death-benefit exception applies and there is no penalty.
• Disclaim under IRC §2518, letting the assets pass to contingent beneficiaries (usually adult children). This is the move when the surviving spouse does not need the assets and the estate would otherwise waste federal or state exemption. See "Contingent-beneficiary DSUE planning" below.

For a spouse over 59½ with reasonable life expectancy, the rollover almost always wins. It resets the RMD clock, allows Roth conversions from a position of ownership, keeps the tax-deferred wrapper intact, and preserves the ability to control the eventual 10-year-rule clock for children.

7. Roth accounts at death: same estate treatment, no IRD

A Roth IRA and Roth 401(k) are subject to §2039 inclusion at date-of-death fair market value, exactly like Traditional accounts. The differentiation happens at the income-tax layer: qualified distributions from a Roth are income-tax free under §408A(d), and a beneficiary who inherits a Roth held by the decedent for at least 5 years takes qualified distributions.^[10] There is no IRD. There is no §691(c) deduction because there is no double tax to remedy.

This asymmetry is the foundation of the single most valuable pre-death planning lever available to owners of taxable estates: Roth conversions in the years leading up to death. A $500,000 Roth conversion at a 24% marginal rate costs $120,000 in income tax that comes out of the taxable brokerage account (or the Traditional IRA — either works, but paying from taxable is materially better because it removes tax dollars from the estate while preserving Roth space). The result:

• $120,000 of estate-taxable brokerage is now gone (paid to the IRS in income tax), reducing the taxable estate by $120,000. In a state with a 16% estate tax, that's $19,200 saved. Combined with federal 40%, up to $67,200 saved on that $120,000 alone.
• $500,000 that was going to leave the estate as pretax dollars (with heirs owing IRD income tax as it distributed over 10 years) is now Roth — same estate value, but heirs receive it income-tax free.
• Non-spouse heirs still face the 10-year rule under §401(a)(9)(H), but there is no RMD requirement during years 1–9 because Roth accounts have no lifetime RMD (§408A(c)(5)). The heir can let the account grow tax-free for 10 full years, then take a lump sum in year 10.^[8]

For estates where the pre-death owner's marginal rate is lower than the expected marginal rate of the eventual beneficiaries — common for a retired parent in a low-tax state with high-earning heirs in California, New York, or New Jersey — the Roth conversion economics are decisive. Even at a 24% conversion cost, the future income tax saved for heirs plus the estate tax saved on the conversion tax dollars can produce a 3× to 5× return on the conversion tax outlay over a 20-year time horizon.

8. See-through trusts and the four-requirement stretch preservation test

Many owners want a trust rather than an individual as beneficiary — for creditor protection, for asset management during minority or incapacity, for control over remarriage scenarios, for special-needs planning. A trust that meets the four "see-through" requirements under Treas. Reg. §1.401(a)(9)-4(f) is treated as if the underlying trust beneficiaries were the direct beneficiaries of the plan for §401(a)(9) purposes. A trust that fails the test is a "non-designated beneficiary" and forced into the 5-year rule (pre-RBD deaths) or the ghost life expectancy (post-RBD deaths) — usually worse than the 10-year rule.

The four requirements:

1. Valid under state law. The trust must be effective under the law of the state whose law governs. A trust never formally executed, or invalidated for lack of consideration, fails this test.
2. Irrevocable, or becomes irrevocable, on the participant's death. A revocable living trust that becomes irrevocable at the grantor's death is fine.
3. Identifiable beneficiaries. The trust's beneficiaries — including all remainder beneficiaries — must be identifiable from the trust instrument. "My then-living descendants per stirpes" is identifiable. "Charitable purposes I later designate" is not.
4. Documentation delivered to the plan administrator by October 31 of the year following the participant's death. Either a copy of the trust instrument, or a certification identifying the primary and contingent beneficiaries under the state's certification statute.

The final regulations divide see-through trusts into two categories with materially different mechanics:

• Conduit trust. The trust must distribute all retirement-plan distributions to the current beneficiary immediately upon receipt. Under §1.401(a)(9)-4(f)(2), only the conduit beneficiary is counted for RMD purposes — the remaindermen are disregarded. If the conduit beneficiary is a spouse, minor child of decedent, disabled or chronically ill individual, or someone not more than 10 years younger, the EDB stretch applies. Otherwise the 10-year rule applies. The critical downside: every distribution passes straight through to the conduit beneficiary, defeating the creditor-protection and control-over-distributions motives that are often why the trust exists.
• Accumulation trust. The trust may retain distributions rather than pass them through. Under §1.401(a)(9)-4(f)(3), the RMD analysis looks through to ALL identifiable beneficiaries — including remaindermen — because any of them might ultimately receive the retained assets. This means one non-EDB remainder beneficiary (an adult niece, a charity, an older-generation sibling) can force the whole trust into the 10-year rule. Careful trust drafting can carve out non-EDB remainder beneficiaries so the accumulation trust still qualifies for EDB stretch treatment.

9. Twelve planning levers that actually reduce the total tax bill

Every taxable estate holding retirement accounts should consider these twelve levers in roughly the order given. The first six are lifetime moves executed by the owner. The last six are post-death moves executed by the beneficiary or executor.

Lifetime moves (by the account owner)

1. Roth conversions in low-income years — pre-Medicare, post-retirement, and pre-Social-Security windows often produce marginal rates in the 12%–24% federal bracket vs 32%–37% for eventual beneficiaries. Convert to fill low brackets each year. Pay conversion tax from taxable brokerage, not from the IRA itself, to maximize estate-tax reduction.
2. QCDs after 70½ — up to $108,000 per taxpayer in 2026 (SECURE 2.0 §307 indexed the prior $100,000 cap).^[11] Direct transfer from IRA to public charity, counts toward RMD, excluded from AGI (reducing IRMAA, Social Security taxation, and Medicare Part B/D premiums), and removes the transferred amount from the eventual estate. This is the single most efficient charitable-giving vehicle for retirees with IRA assets and charitable intent.
3. Naming a charity directly as beneficiary of Traditional IRA — the charity, as a §501(c)(3) exempt organization, owes no income tax on the IRD, and the full account value is deductible from the taxable estate under IRC §2055. This is asset-location at death: put IRD-heavy assets to charity, put step-up-eligible assets to human heirs.
4. Annual exclusion gifts — $19,000 per donee in 2026 (IRC §2503(b), indexed). A retiree with $2 million in cash and eight grandchildren can move $152,000 out of the estate per year, without touching lifetime exemption. Over ten years, $1.52 million exits the estate at zero transfer-tax cost.
5. Irrevocable life insurance trust (ILIT) to fund estate-tax liquidity — an ILIT holds a life insurance policy on the decedent's life, keeping the death benefit out of the taxable estate under §2042. The ILIT then loans or purchases assets from the estate at death, providing cash to pay estate tax without a fire-sale of the Traditional IRA. Critical caveat: existing policies transferred into an ILIT are pulled back into the estate under IRC §2035(a) if the decedent dies within three years. Buy new policies inside the ILIT, or execute transfers early.
6. Retirement-plan bypass trust — for larger estates, direct the retirement account into a trust that qualifies for the state (or federal) estate-tax exemption at the first spouse's death, rather than rolling over to the surviving spouse. This preserves both spouses' estate-tax exemptions in states like Illinois that do not allow portability. The trade-off: the retirement account loses the spousal-rollover treatment and the beneficiary trust is subject to see-through rules and the 10-year window.

Post-death moves (by beneficiary or executor)

7. Spousal rollover election — as discussed above, almost always correct for a spouse over 59½ with reasonable life expectancy.
8. Qualified disclaimer under §2518 — the surviving spouse (or any beneficiary) can disclaim within 9 months of death, letting the assets pass to contingent beneficiaries. Often used to fund a bypass trust when the surviving spouse doesn't need the assets and the estate would waste state exemption.
9. §691(c) deduction — the IRD-beneficiary claims the deduction on Schedule A in the year of income inclusion. If distributions are spread over years, the deduction is spread proportionately. Do not miss this. CPAs sometimes overlook it.
10. Separate account election — when multiple non-spouse beneficiaries inherit the same account, splitting into separate inherited-IRA subaccounts by September 30 of the year following death lets each beneficiary use their own life expectancy (if EDB) or their own 10-year window. Without the split, the trust's or account's oldest non-EDB drives the schedule for everyone.
11. NUA election for employer stock in 401(k) — under IRC §402(e)(4), if the decedent held employer stock inside a 401(k), the beneficiary can distribute the employer stock in-kind, pay ordinary income tax only on the cost basis, and hold the unrealized appreciation (NUA) as long-term capital gain regardless of holding period. In a $1 million 401(k) with $200,000 cost basis in Apple stock and $800,000 of NUA, this can save $200,000+ in tax vs a straight 10-year rollout.
12. Post-death Roth conversion — the beneficiary cannot convert an inherited Traditional IRA to a Roth (§408A(c)(6)(B) explicitly prohibits it). BUT the surviving spouse who elects spousal rollover CAN then convert; and the estate itself, before distribution, can convert if the decedent had elected but not completed a conversion pre-death (rare, but real). This is another reason spousal rollover is the default move.

10. Three worked case studies at $6M, $12M, and $28M

Case study A: Sarah and Tom, $6M Illinois estate, ages 68 and 71

Sarah is a retired teacher (public school pension already annuitized, no lump sum). Tom is a retired engineer with $2 million in a Traditional 401(k) and $600,000 in a Roth 401(k). Together they own a $1.8 million paid-off home in Naperville, $1.4 million in a taxable brokerage account, and $200,000 in cash. Total estate: $6.0 million. Adult children Marcus (age 42, Chicago attorney at $340K income) and Diana (age 40, San Francisco software engineer at $290K income) are the beneficiaries.

Federal estate tax exposure: zero. Federal exemption is $30 million MFJ; the estate uses none of it.

Illinois estate tax exposure (no planning): Illinois exemption is $4 million per decedent with no portability. Assume Tom dies first, leaving everything to Sarah. Sarah's estate at her later death: $6 million. Illinois estate tax on $2 million above the $4 million exemption at the 16% top marginal ≈ $320,000. All of the retirement assets are IRD to the extent Traditional; the $2 million Traditional 401(k) generates roughly $600,000 of federal + Illinois combined income tax as Marcus and Diana each distribute over 10 years at their high marginal rates. Total post-death tax on the retirement assets alone: $320K estate + ~$600K IRD ≈ $920K on $2.6 million of retirement accounts.

With planning:

• Bypass trust at Tom's death funds $4 million (Tom's Illinois exemption) into a credit shelter trust; the remaining $2 million passes to Sarah's marital trust. At Sarah's later death, only the marital-trust assets are in her estate. Illinois tax at her death: ~$0. Savings: $320,000.
• Roth conversion program: Tom converts $150,000/year of Traditional 401(k) to Roth over 4 years (ages 71–74), paying conversion tax from taxable brokerage at 24% federal / 4.95% Illinois combined ≈ 29% rate = $174,000 total tax paid. Roth balance grows to ~$650K over 4 years; Traditional 401(k) shrinks to ~$1.4M. IRD income tax savings for Marcus and Diana on the converted $600K: ~$240,000 combined at their higher marginal rates. Net gain: $240K IRD saved − $174K conversion tax = $66,000, plus the $174,000 conversion-tax dollars now permanently outside the estate save another $27,840 of Illinois tax. Combined savings: ~$94,000.
• QCDs from Tom's Traditional IRA: $30,000/year to United Way and church for 3 years (ages 71–73) = $90,000 out of the estate. Illinois tax saved: $14,400. Plus AGI reduction reduces Medicare IRMAA surcharges by roughly $600/year in Part B premiums.

Total savings: $320K + $94K + $14K ≈ $428,000 on a $6 million estate. Roughly 7% of the entire estate value, and 71% of the total tax bill the family would have paid without planning.

Case study B: David and Rachel, $12M NY estate, ages 62 and 60

David is a dentist ($1.8 million Traditional 401(k), $400K Roth IRA, $800K SEP-IRA). Rachel is a hospital administrator ($900K Traditional 401(k), $200K Roth 401(k)). Their $3 million home is in Westchester County. They have $4.5 million in a taxable brokerage account (mostly Apple, Microsoft, and NVDA with $1.8 million cost basis) and $400,000 in cash. Total estate: $12 million. Adult children Priya (age 32, resident anesthesiologist) and Ashwin (age 30, hedge fund analyst at $520K income) are the beneficiaries.

NY estate tax exposure: NY has a $7.35 million exemption with a 5% cliff mechanic — estates above 105% of exemption owe tax on the FULL value, not just the excess.^[12] A $12 million estate is well above the $7.7 million cliff, so the entire $12 million is subject to NY estate tax. Top marginal 16% × $12 million ≈ $1.4 million NY tax without planning.

Federal estate tax: $0 (below the $30 million MFJ exemption).

IRD exposure: $3.5 million of Traditional retirement assets. Priya and Ashwin at their combined 35%–37% federal + 6.85% NY marginal rates face ~42% combined tax on IRD, so $3.5M × 42% ≈ $1.47 million IRD income tax over the 10-year window.

Total unplanned tax: $1.4M NY estate + $1.47M IRD ≈ $2.87 million on a $12 million estate — 24% of the entire estate.

With planning:

• Aggressive Roth conversion program: David converts $200K/year for 10 years starting age 62, paying tax from taxable brokerage. Total converted: $2 million at ~30% combined federal+NY = $600K tax paid. After 10 years David's Traditional IRA is $600K, Roth is $2.4 million (with growth). IRD savings for Priya and Ashwin: 42% × $2M = $840K. Estate-tax savings on $600K of conversion tax paid: 16% × $600K = $96K. Net gain: $840K + $96K − $600K = $336,000. Plus the Roth grows tax-free forever, so heirs get significantly more spending power.
• ILIT with $1.5 million second-to-die life insurance policy, funded by annual exclusion gifts ($19K × 2 spouses × 2 children = $76K/year Crummey withdrawal rights). Policy pays $1.5M outside the estate at second death, provides liquidity for estate tax without forced Traditional-IRA distribution. Assume total premium $32K/year × 22 years ≈ $704K in premium; net insurance benefit ≈ $796K received tax-free. Estate-tax savings on $704K of premium that left the estate over 22 years: 16% × $704K = $113K.
• Charitable planning: name a donor-advised fund (Fidelity Charitable) as 15% beneficiary of David's Traditional 401(k) = $270K. Estate charitable deduction eliminates $270K from the taxable estate under §2055, saving $43K NY estate tax. No IRD income tax because charity is exempt. This is a savings of $43K + (42% × $270K) = $156K total.

Combined savings: $336K + $113K + $156K ≈ $605,000 — reducing total tax exposure from $2.87M to $2.27M, or 21% of tax burden eliminated.

Case study C: Marcus and Elizabeth, $28M Washington estate, ages 71 and 68

Marcus sold his manufacturing business in 2022. Their assets: $8M in Traditional IRA (rolled from his SEP), $2M Roth IRA (post-sale conversion program), $4M home in Bellevue, $12M in taxable brokerage ($9M cost basis, mostly index funds and a concentrated position in an ex-competitor's stock), $2M in municipal bond ladder. Total $28M. Three adult children ages 42, 40, and 37, all in California in the 35% federal + 12.3% state bracket.

Federal estate tax: $0. Estate is under $30M MFJ exemption. Both spouses' federal exemptions are used up to $28M combined leaving $2M of unused federal exemption.

Washington estate tax: WA exemption is $3.076M per decedent for TY2026 with no portability. Under SB 6347 post-July-1-2026 the top marginal is 20%. Assume Marcus dies first with a proper bypass trust funded to $3.076M. Elizabeth's later estate is $28M − $3.076M = $24.9M. WA tax at 20% on excess above $3.076M ≈ 20% × $21.83M = $4.37 million.^[13]

IRD: $8M Traditional IRA × 47.3% combined California income tax at children's marginal rate = $3.78M IRD income tax over 10 years.

Unplanned total tax: $4.37M WA + $3.78M IRD ≈ $8.15M on $28M estate (29%).

With planning:

• Full bypass trust at Marcus's death: $3.076M of WA exemption preserved; assume Elizabeth's estate at death is $24.9M. WA tax same as above at $4.37M.
• Aggressive lifetime Roth conversion program starting immediately: convert $500K/year for 8 years = $4M converted. Federal tax at 32% = $1.28M paid from taxable brokerage. After 8 years, Traditional IRA is ~$4M, Roth is ~$6.5M. IRD income tax saved for children: 47.3% × $4M = $1.89M. Estate-tax savings on $1.28M of conversion tax paid: 20% × $1.28M = $256K. Net gain: $1.89M + $256K − $1.28M = $866K.
• ILIT with $5M second-to-die policy, funded through Crummey gifts and remaining $2M federal gift exemption. Premium ~$120K/year × 15 years = $1.8M premium; $5M tax-free death benefit outside the estate. Estate-tax savings on premium removed: 20% × $1.8M = $360K.
• Grantor Retained Annuity Trusts (GRATs) — Marcus zeros out five rolling 3-year GRATs each holding $1M of the ex-competitor stock over a 10-year period. Assume 30% total appreciation captured tax-free in the GRATs' remainder trusts = ~$1.5M passed to children outside the estate. Estate-tax savings: 20% × $1.5M = $300K.
• Charitable Remainder Trust (CRT) funded with the concentrated stock position: $3M into a 5% CRUT, providing Marcus and Elizabeth $150K/year for life, income-tax-free step-up on the CRT's sale of the concentrated position, and a partial charitable deduction upfront. Remainder goes to donor-advised fund. Estate-tax savings on the $3M removed: 20% × $3M = $600K.

Combined savings: $866K + $360K + $300K + $600K ≈ $2.13M — reducing total tax from $8.15M to $6.02M, or 26% of tax burden eliminated. Plus non-tax benefits (guaranteed lifetime income from the CRT, insured liquidity for the estate, avoidance of forced Traditional IRA distribution at bad market timing).

11. Six mistakes to avoid

1. Assuming your state has estate-tax portability. Federal §2010(c)(4) DSUE portability is now permanent under OBBBA, but only three of the twelve estate-tax states (Hawaii, Maryland, Illinois for QTIP-elected portions only) offer state-level portability, and even those are narrow. In the other nine states, failure to use a bypass trust at the first spouse's death permanently wastes that spouse's state exemption. This is the single most common planning miss for middle-market couples in Massachusetts, Oregon, Washington, Illinois, and Minnesota.^[6]
2. Naming your revocable living trust as sole beneficiary of every retirement account. Estate-planning attorneys sometimes do this out of habit. It forces every account through the see-through trust regs, complicates the RMD analysis, and — if the trust drafting is imperfect — can drop the account into the 5-year rule or the ghost life expectancy. Best practice: name individual beneficiaries when possible, use trusts only when the situation genuinely requires them (minor children, special needs, remarriage protection, creditor concerns).
3. Buying life insurance for estate-tax liquidity in your own name. IRC §2042 pulls the death benefit into the estate if the decedent held any "incidents of ownership." The whole point of using life insurance for estate-tax liquidity is to keep the proceeds outside the estate — which requires the policy to be owned by an ILIT, a spouse, or an adult child from inception. Post-purchase transfers into an ILIT reset the §2035(a) 3-year lookback clock — die within three years and the death benefit comes back into the estate. Buy new policies inside the ILIT.
4. Missing the §691(c) deduction. If the decedent's estate paid federal estate tax and the beneficiary is receiving IRD (Traditional IRA distributions, deferred compensation, unpaid interest), the §691(c) deduction is available every year the beneficiary reports the IRD. Many CPAs miss this because IRA custodians do not report it and the estate's Form 706 is often not shared with the beneficiary's income-tax preparer. Ask specifically.
5. Rolling over an inherited IRA before considering the §72(t) exception window. A surviving spouse under age 59½ who executes the spousal rollover locks themselves into the 10% early-withdrawal penalty until age 59½. If cash flow matters in the short term, staying as beneficiary preserves the §72(t)(2)(A)(ii) death-benefit exemption. Roll over at 59½.
6. Naming a §501(c)(3) charity as beneficiary of the Roth IRA instead of the Traditional IRA. This is asset-location backward. The charity owes no income tax either way, so both Traditional and Roth are equally "cheap" to leave to charity. But your human heirs pay ordinary-income IRD tax on Traditional distributions at their marginal rates, while they pay $0 on Roth distributions. Give the IRD-heavy Traditional IRA to charity, give the tax-free Roth to your heirs. This one asset-location switch can save six figures on a mid-size charitable estate.

12. Your 8-item action checklist

You can do these actions this week. They require calling your IRA custodian, opening a spreadsheet, and having a 30-minute conversation with your estate-planning attorney or CPA. In that order.

1. Pull the current fair market value of every retirement account you own — Traditional IRA, Roth IRA, 401(k), 403(b), 457(b), SEP, SIMPLE, inherited IRAs you have not yet rolled over. Add them up. Add your non-retirement estate. Compare against the federal $15M-per-person exemption AND your state's exemption from the state field guide.
2. Log into every retirement account custodian and verify the current primary and contingent beneficiary designations. Divorce, remarriage, births, deaths, and rollovers all break beneficiary chains. Update anything stale.
3. If your estate is above your state's exemption, ask your attorney whether your existing will and revocable trust structure creates a proper bypass trust at the first-spouse death. Most pre-2018 wills do not, because at that time the federal exemption swallowed everything.
4. Model a Roth conversion program for the next 3–5 years. Use the CalcLeap Roth IRA calculator and the income tax calculator to size annual conversions that fill your marginal bracket without spilling into IRMAA cliffs. Pay conversion tax from taxable brokerage, not from the IRA.
5. If you are over 70½ and charitably inclined, replace check-writing to charity with Qualified Charitable Distributions. Contact your IRA custodian for the QCD paperwork. You can move up to $108,000 per person in 2026 out of the estate directly to charity, with no income-tax impact.
6. Consider naming a §501(c)(3) donor-advised fund or public charity as beneficiary of a portion of your Traditional IRA (10–25% is a common range for charitable estates). Human heirs get your Roth and taxable assets; charity gets the IRD.
7. Talk to your attorney about a retirement-plan bypass trust or a separate see-through trust for retirement assets, especially if you have minor children, disabled beneficiaries, second-marriage circumstances, or concerns about a beneficiary's creditors or spouse.
8. If your combined estate is above $5 million, get a life insurance quote from a fee-only insurance broker for a survivorship (second-to-die) policy sized to cover expected state estate tax. Structure it inside an ILIT from day one — do not transfer an existing policy.

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