FINANCIAL FOCUS: CON'T LOSE ASSETS TO PAY ESTATE TAXES

This "Financial Focus" column is prepared by Edward Jones Investments, headquartered in St. Louis. Jones includes branches throughout the nation, including Cape Girardeau and Jackson.

When you accumulate wealth in your IRA, you're certainly helping yourself prepare for a comfortable retirement. But if you're not careful, your big IRA could end up making things quite uncomfortable for your heirs.

The problem can arise if you don't actually need all the IRA money you've saved. If you don't use it, where does it go?

In all likelihood, it will end up as part of your estate and that means your heirs could be looking at a large estate-tax bill. Of course, laws constantly change; in fact, there is a push in Congress to eliminate the estate tax. But it hasn't happened yet so it's clearly better to take matters into your own hands.

If you don't plan ahead, your heirs will actually be hit with two sets of taxes once they inherit your IRA as part of your estate. First, there's the estate tax. If your taxable estate is worth at least $675,000 in 2000, then it may be subject to estate taxes. (This figure will rise gradually to $1 million over the next several years.) If your heirs don't have the money to pay these taxes, they may have to cash out your IRA -- which means they'll also owe income taxes. Together, these two taxes could wipe out more than 70 percent of your IRA's value.

Fortunately, you can take steps to prevent this from happening. For one thing, you may consider "spending down" your IRA while you're alive and saving other assets to pass on at death. You also could name a charity as the beneficiary of your IRA, thus avoiding all taxes on the IRA. Or you could do the same thing you would do to protect against other types of risk buy some insurance.

Specifically, buy a policy on yourself and name your heirs as the beneficiaries. Once your estate is settled, your heirs can use the insurance proceeds to help pay the estate taxes. To avoid having the policy become part of your taxable estate, you may want to establish a life insurance trust as the legal policy owner. Family members also could own the policy. The cost of the premiums will be a lot less than the estate and income taxes your heirs would face if you did nothing.

Actually, your heirs will still have to pay income taxes on the distributions they receive from your IRA. However, IRS regulations allow them to stretch these distributions out over a number of years -- or even over the course of a lifetime. This stretchout allows your heirs to minimize their tax burden by spreading it out over a long period of time. And the money they leave in the IRA will continue to grow tax-deferred -- or tax-free, in the case of a Roth IRA.

You should use your tax adviser about how your IRA might affect your taxable estate. By making the right moves today, you can save your beneficiaries headaches -- and possibly taxes -- in the future.

The Southeast Missourian does not recommend that readers buy or sell stocks featured in this column, which is provided for informational purposes only.