You’ve worked hard all your life and enjoyed a successful career. Along the way, you’ve sacrificed to put money into retirement programs, building a nest egg to provide for you and your family the rest of your life. If you live just off the interest, you can leave a nice inheritance for your children.

Unfortunately, Uncle Sam could take over 80% of it in taxes, leaving your children with much less than you expected. If you owe estate taxes at your death and haven’t planned properly, your children may be forced to tap into your retirement accounts. This could result in 35% being lost in income taxes on top of 48% being lost to estate taxes!

There are two kinds of taxes that affect IRAs and other pre-tax accounts. The first is income tax. When money is withdrawn from these pre-tax accounts, ordinary income tax is paid on the full amount withdrawn. Withdraw $50,000 from your IRA, pay income taxes on $50,000.

Since IRAs and other retirement accounts have a beneficiary and, typically, are not subject to Probate, many people think they’re not subject to estate taxes. That’s wrong. The full value of these accounts is included in the value of your estate and may be subject to estate taxes.

What’s worse, the value of your estate isn’t reduced by the income taxes due if you pull money out of these pre-tax accounts. For instance, let’s say you have $1,000,000 in an IRA. Even though you would only have about $650,000 if you took it out and paid income taxes on it, the full $1,000,000 might be subject to estate taxes.

Each of us has an estate tax exemption of $1,500,000 for 2004. If you’re married, that means you and your spouse should be able to pass on $3,000,000 before worrying about estate taxes. But couples with smaller estates can still end up paying estate taxes.

For instance, Bill and Sue are happily retired. Bill retired and rolled $1,000,000 into a Traditional IRA. Sue also had an IRA worth $500,000. They owned a home and other real estate bringing the value of their estate to $2,500,000.

Since his IRA would be his wife’s main source of income when he died, Bill named Sue as his primary beneficiary. He passes away and also leaves the rest of his share of the estate to Sue. There aren’t any estate taxes or income taxes on transfers between spouses.

The problem occurs when Sue dies. The value of the estate is $2,500,000. She can only pass $1,500,000 free of estate tax. The result is roughly $500,000 in estate taxes must be paid 9 months after her death.

Since the IRAs are the only source of readily available funds, the children withdraw money from Bill’s IRA. This means that almost $350,000 more is due in income taxes.

How are they going to pay those additional income taxes? By taking more money out of the IRA. So the have to pay even more in income taxes! Ultimately, very little of the IRA is left for the children.

What can you do if your largest asset is an IRA and you face a similar situation? You can reduce the amount of estate taxes owed through the use of special trust vehicles.

Additionally, the portion of an IRA or estate that is not left to a surviving spouse counts toward the decedent spouses’ exemption, so leaving a portion of an IRA to a child instead of a spouse can reduce estate taxes.

Life insurance can be used to provide the liquidity needed so that the children don’t have to tap the IRAs for funds to pay the estate taxes.

Consult with a qualified professional to properly take advantage of these complex strategies. But act now, because these strategies are only effective while you are still alive.

Nationally-syndicated financial columnist and Certified Financial Planner® Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He’ll answer your financial question – FREE at http://www.guardingyourwealth.com