New York Estate Planning & Elder Law

Inherited IRAs Require Careful Handling / White Plains, NY & New York, NY

“One wrong decision can lead to expensive consequences, and good luck trying to persuade the IRS to give you a do-over.”

For those who inherit IRAs, the intersection of taxes, estate law and financial planning can be a tricky place. There are many choices, maybe too many, and making the wrong choice can be costly, according to the recent article “6 inherited IRA rules all beneficiaries must know” from Bankrate.

There are two categories of beneficiaries. Surviving spouses, minor children, chronically ill or disabled individuals, or someone who is not less than 10 years younger than the original owner are subject to one set of rules. Everyone else has another set of rules.

You’ll need to know if the original owner had taken any RMDs—required minimum distributions—before they passed.

Did you want to minimize taxes, or is it more important for you to maximize cash distribution?

These are just a few of the issues to be addressed. Already complicated, inherited IRAs got even more complicated because of the SECURE Act, which changed some longstanding practices. Some experts tell beneficiaries not to do anything, until they meet with an estate planning attorney. The worst thing someone could do is make a wrong step and lose half of the IRA to taxes.

Here are the six rules for inherited IRAs:

1–Spouses have the most flexibility. The surviving spouse may treat the IRA as her own, naming herself as the owner. She can also roll it over into another account, such as another IRA or a qualified employer plan (including 403(b) plans). She could also treat herself as the beneficiary of the plan. However, each choice leads to further choices and decisions. She might let the IRA grow in the account until she reaches age 72, the new age for RMDs. Or she can roll the IRA into an IRA of her own, which lets her then name her own beneficiary.

2—When do you want to take the money? If you fall into the category of surviving spouses, minor children, chronically ill or disabled individuals, or someone who is not less than ten years younger than the original owner, then you can take the distributions over your own life expectancy. That’s the “stretch” option. Otherwise, you need to take distributions from the account over ten years, according to the SECURE Act. Depending on the size of the IRA, that could be a nasty tax bill. You can take as little or as much as you want, but by year ten after the owner’s death, the account must be empty.

3—Know about year of death required distributions. If the owner of the IRA did not take his RMD in the year of his death, beneficiaries are required to do so. If a parent dies in early January, for example, it’s not likely he took his RMD. The IRS doesn’t care if you didn’t know—you’ll be liable for a penalty of 50% of the amount that wasn’t taken out. If someone dies close to the end of the year, it’s possible that heirs might not know about the accounts until after the deadline has passed. If the deceased was not yet 70½, there is no-year-of-death distribution.

4—Get all the breaks you can—tax breaks. For estates subject to the estate tax, IRA beneficiaries will get an income-tax deduction for estate taxes paid on the account. The taxable income earned but not received by the deceased is called “income in respect of a decedent.” When someone takes a distribution from an IRA, it’s treated as taxable income. However, the decedent’s estate is paying a federal estate tax, so beneficiaries get an income-tax deduction for estate taxes paid on the IRA. For a $1 million income in an inherited IRA, there could be a $350,000 deduction offset against that.

5—Beneficiary forms matter. An entire estate plan can be undone by a missing beneficiary form, or one that is not filled out correctly or is ambiguous. If there is no designated beneficiary form and the account goes to the estate, the beneficiary will need to take the distribution from the IRA in five years. Forms that aren’t updated, are missing, or don’t clearly identify the individuals create all kinds of expensive headaches.

6—Improperly drafted trusts are trouble. If they are done wrong, a trust can limit beneficiary options in a big way. If the provisions in the trust are not properly drafted, some custodians won’t be able to see through the trust to determine the qualified beneficiaries. Any ability to maximize the time to take money out of an IRA could be lost. An experienced estate planning attorney who knows the rules about IRAs and trusts is a must.

Reference: Bankrate (July 17, 2020) “6 inherited IRA rules all beneficiaries must know”

For more information on asset preservation and estate planning, please visit my estate planning website.

Educating Your Children about Estate Planning / New York, NY & White Plains, NY

You may think your work is done when your estate plan is completed.  However, a remaining step may be informing the kids about what they face.

If you wish to pass your estate on to your children, it might be a good idea to spend some time educating them about the challenges and responsibilities they face, according to Kiplinger in “5 Financial Challenges Your Kids Will Face With Your Estate.”

Many parents don’t have the answers themselves to these questions, so they have to come up to speed first before they can talk about these matters with their kids.

Five things to pass on to the children:

Taxes and IRAs. Chances are your children won’t know that they will be paying taxes on IRA withdrawals. They will be likely to take a “stretch” IRA option and leave funds in the IRA for as long as possible, while taking RMDs (Required Minimum Distributions) based on their life expectancy. The stretch option is smart.  However, a child who wants a new car or a down payment for a house, may not understand the impact of taxes on their inherited IRA. Make sure they see the numbers and how much of a bite taxes will take.

Can they do an IRA rollover? A spouse can rollover an inherited IRA into their own IRA or 401(k) but a non-spouse beneficiary cannot. If they do, the entire amount of the IRA becomes taxable income. There are no second chances. Make sure that the IRA custodian who will administer the IRA for your heirs automatically takes care of the RMDs, so they don’t have to worry about it. If they don’t take the RMDs, they’ll have to pay a hefty tax.

What taxes are due on an inherited annuity? Inherited annuities come with a variety of limitations and taxes. The insurance company will issue a 1099 for any untaxed growth to the heir.  This must be included as gross income for that tax year. If the recipient isn’t expecting it or doesn’t know it’s a tax, it could come as an expensive surprise.

What is a “step-up in basis”? This applies to stocks, bonds and real estate. The value of the asset on the day you die is the cost basis to your heir.  It is not what you paid for it originally. Let’s say you bought a second home for $300,000 and it appreciates to half a million dollars in value. If your child sells the house for more than $500,000—its value on the day of your death—any capital gains taxes will be calculated on the $500,000—the “stepped-up basis”—and not the $300,000 original cost or basis.

Who will have the details? Set up a family meeting with your estate planning attorney and your adult children at a time that works for all of you. They’ll be more comfortable in the days and weeks after your passing, if they know who they’ll be working with to settle your estate.

Reference: Kiplinger (April 3, 2018) “5 Financial Challenges Your Kids Will Face With Your Estate.”

For more information on elder law, asset preservation and estate planning, please visit my estate planning website.

IRA Options Key Part of Estate Planning / New York, NY & Greenwich, CT

What you decide to do with retirement accounts can be a major enhancement to your estate plan.

IRA retirement benefits can be used as a way to balance out other bequests and it can be used to support other estate planning goals. There are also tax implications to consider, according to  Morningstar in "Who Should Inherit Your IRA?"

Among the options are:

• Spouse - If your spouse is the beneficiary, he or she can roll your IRA into their own. However, it might not make sense to designate a spouse, if they are nearing the age of having to take required minimum distributions and will not need the money.
• Child or Grandchild - If they inherit the IRA, then they can stretch the benefits out over their own lifetimes. However, as a practical matter, few do so because they need the money.
• Charity - Your estate can get a tax deduction, if you leave your IRA to a charity. It can be complicated, so get expert advice before filing out a beneficiary designation form.
• Your estate - There is not much benefit to naming your estate as the beneficiary. However, if you cannot decide on another option, you can do so.
• A trust - Ordinarily, there is no benefit to leaving your IRA to a trust. However, if the beneficiary would otherwise be a minor child or unable to manage their finances, it might be necessary to do so.

Reference: Morningstar (March 2, 2018) "Who Should Inherit Your IRA?"

For more information on asset preservation and estate planning, please visit my estate planning website.

Inheriting an IRA / Greenwich, CT & New York, NY

If you inherit an IRA, you need to carefully consider your options and tax consequences.

Americans hold a staggering amount of wealth in individual retirement accounts. It is far more wealth than the current account holders could ever possibly spend in their own lifetimes.

That means that many people who have IRAs will eventually pass them on to their beneficiaries.

While that can be great news for those who inherit the accounts, it can also turn to bad news, if the beneficiaries make the wrong decisions about what to do with those accounts.

Recently, Forbes discussed what some possibilities are for beneficiaries in "What To Do If You Inherit an IRA."

The single most important thing to keep in mind is that an inherited IRA can be the source of lifetime payments or it can be a source of a very large and immediate tax bill.

If you are smart, then you will want it to be the former, unless you absolutely need a large sum of money right away.

The general rule of thumb is that you should never take more out of an inherited IRA than you are absolutely required to take by law. It is recommended that you take no more than the required minimum distribution.

The exact amount will depend on several factors.

That is why you should never make a decision about what to do with an inherited IRA without first seeking the advice of attorneys and accountants.

Reference: Forbes (July 10, 2017) "What To Do If You Inherit an IRA."

For more information on asset preservation and estate planning, please visit my estate planning website.

US Supreme Court Ruling Permits Creditors to Go After IRAs / White Plains, NY

In a unanimous ruling written by Justice Sonia Sotomayor, the court said inherited IRA money not received from a spouse isn't protected in bankruptcy proceedings.

The Supreme Court ruling applies to inherited IRAs but not to other types of retirement accounts. It also clarified instructions in the Bankruptcy Code, as millions of baby boomers begin to leave behind unspent IRA money to families and loved ones.

"Nothing about the inherited IRA's legal characteristics would prevent (or even discourage) the individual from using the entire balance of the account on a vacation home or sports car immediately after her bankruptcy proceedings are complete," Justice Sotomayor wrote.

The Wall Street Journal article, "Supreme Court Allows Creditors to Tap Into Inherited IRA Money," notes that courts have been divided on whether money that an individual inherits from an IRA should get special protection. Bankruptcy law protects certain property that creditors would want to seize to pay debts, which can include some equity in a person's primary residence, an inexpensive car or a few hundred dollars worth of household furniture. The reasoning behind this protection is that people need a base on which to rebuild their lives once they clear their debts. These same rules permit people to keep up to $1.3 million in retirement funds they have in an IRA.

This inheritance issue came up in the case of a couple who filed for bankruptcy in 2010. They inherited $293,000 of IRA money which the wife received when her mother died in 2001. Lawyers for the couple argued the money was protected from debts that stemmed from closing their pizza shop in 2009. The bankruptcy trustee sought those funds to cover, among other things, a $74,000 judgment in favor of the restaurant's landlord.

The Wall Street Journal article stated that last year more than 45 million U.S. households had some type of retirement account and the overall value of those accounts was more than $5.7 trillion in the second quarter of 2013, according to the Investment Company Institute, a Washington, D.C.-based trade association for U.S. investment firms. The WSJ said that it was not clear how many people file for bankruptcy with inherited IRA money in their possession.

Reference:  Wall Street Journal (June 12, 2014) "Supreme Court Allows Creditors to Tap Into Inherited IRA Money"

For more information on asset preservation and estate planning, please visit my estate planning website.

No Beneficiary Designation? An IRA "Uh-Oh"/ White Plains, NY & Greenwich, CT

We say it over and over again. Check your beneficiary forms! Don't let your retirement funds go down the drain.

Anything involving the court system is rarely quick and painless (probate anyone?). Fortunately, IRAs can easily be transferred to your loved ones outside of probate simply by completing a beneficiary designation form. But what if there was no beneficiary designation form completed? Uh-oh, what now?

The slightly messy situation of an IRA left without a beneficiary was tackled recently by Ed Slott’s blog, The Slott Report. The article, titled “There is No Beneficiary on the Retirement Account: Now What?,” is the perfect encouragement to ensure that every beneficiary form is filled out and up to date.

The good news is that many accounts have a built-in default to the surviving spouse or children of the owner. Problem: What if that runs contrary to your estate plan? Alternatively, what if the account has no default? In all likelihood the account will then default to your probate estate and will be treated as any old bank account going through probate.

Aside from probate itself, there are lots of rules regarding how IRAs can be inherited and used by the inheritor. They must take distributions just like you do, but when the IRA defaults to your probate estate it gets messy – and fast.

The IRA can be assigned/transferred into a properly titled new account, but then again some IRA custodians simply refuse to do this, making the irreversible and catastrophically taxable choice to distribute the entire account to the estate.

Simply put, an IRA not acting like an IRA within the estate plan is messy. It is easily avoidable by filling out the beneficiary form and keeping it up to date. In some situations this requires being proactive. For example, when a surviving spouse inherits an IRA but passes before naming a new designated beneficiary to the account.

Reference: The Slott Report (January 9, 2014) “There is No Beneficiary on the Retirement Account: Now What?”

For more information on elder law and estate planning, please visit my estate planning website.