What Do I Do With an Inherited IRA?

When a family member dies and you discover you’re the beneficiary of a retirement account, you’ll need to eventually make decisions about how to handle the money in the IRA that you will be inheriting.

Forbes’ recent article, “What You Need To Know About Inheriting An IRA,” says that being proactive and making informed decisions can help you reach your personal financial goals much more quickly and efficiently. However, the wrong choices may result in you forfeiting a big chunk of your inheritance to taxes and perhaps IRS penalties.

Assets transferred to a beneficiary aren’t required to go through probate. This includes retirement accounts like a 401(k), IRA, SEP-IRA and a Cash Balance Pension Plan. Here is some information on what you need to know, if you find yourself inheriting a beneficiary IRA.

Inheriting an IRA from a Spouse. The surviving spouse has three options when inheriting an IRA. You can simply withdraw the money, but you’ll pay significant taxes. The other options are more practical. You can remain as the beneficiary of the existing IRA or move the assets to a retirement account in your name. Most people just move the money into an IRA in their own name. If you’re planning on using the money now, leave it in a beneficiary IRA. You must comply with the same rules as children, siblings or other named beneficiaries, when making a withdrawal from the account. You can avoid the 10% penalty, but not taxation of withdrawals.

Inheriting an IRA from a Non-Spouse. You won’t be able to transfer this money into your own retirement account in your name alone. To keep the tax benefits of the account, you will need to create an Inherited IRA For Benefit of (FBO) your name. Then you can transfer assets from the original account to your beneficiary IRA. You won’t be able to make new contributions to an Inherited IRA. Regardless of your age, you’ll need to begin taking Required Minimum Distributions (RMDs) from the new account by December 31st of the year following the original owner’s death.

The Three Distribution Options for a Non-Spouse Inherited IRA. Inherited IRAs come with a few options for distributions. You can take a lump-sum distribution. You’ll owe taxes on the entire amount, but there won’t be a 10% penalty. Next, you can take distributions from an Inherited IRA with the five-year distribution method, which will help you avoid RMDs each year on your Inherited IRA. However, you’ll need to have removed all of the money from the Inherited IRA by the end of five years.

For most people, the most tax-efficient option is to set up minimum withdrawals based on your own life expectancy. If the original owner was older than you, your required withdrawals would be based on the IRS Single Life Expectancy Table for Inherited IRAs. Going with this option, lets you take a lump sum later or withdraw all the money over five years, if you want to in the future. Most of us want to enjoy tax deferral within the inherited IRA for as long as permitted under IRS rules. Spouses who inherit IRAs also have an advantage, when it comes to required minimum distributions on beneficiary IRAs: they can base the RMD on their own age or their deceased spouse’s age.

When an Inherited IRA has Multiple Beneficiaries. If this is the case, each person must create his or her own inherited IRA account. The RMDs will be unique for each new account, based on that beneficiary’s age. The big exception is when the assets haven’t been separated by the December 31st deadline. In that case, the RMDs will be based on the oldest beneficiaries’ age and will be based on this, until the funds are eventually distributed into each beneficiary’s own accounts.

Inherited Roth IRAs. A Roth IRA isn’t subject to required minimum distributions for the original account owner. When a surviving spouse inherits a ROTH IRA, he or she doesn’t have to take RMDs, assuming they retitle the account or transfer the funds into an existing Roth in their own name. However, the rules are not the same for non-spouse beneficiaries who inherit a Roth. They must take distributions from the Roth IRA they inherit using one of the three methods described above (a lump sum, The Five-Year Rule, or life expectancy). If the money has been in the Roth for at least five years, withdrawal from the inherited ROTH IRA will be tax-free. This is why inheriting money in a Roth is better than the same amount in an inherited Traditional IRA or 401(k).

Speak with an experienced estate planning attorney about an Inherited IRA. The rules can be confusing, and the penalties can be costly.

Call us (228) 460-5243 or email us at info@perklawgroup.com to find our how your estate planning attorney can help you.

Legal disclaimer: The information in this article is provided for information purposes only and should not be construed as legal advice. Your should not act or refrain from acting on the basis of any content included in this article or on our website (www.perklawgroup.com) without seeking legal or professional advice.

Reference: Forbes (September 19, 2019) “What You Need To Know About Inheriting An IRA”

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Preparing for Alzheimer’s

Once there has been a diagnosis of dementia, there are a number of issues that families need to address, including legal issues. The best way to approach this task, says being patient in the article “Alzheimer’s and the Law” is to meet with an estate planning attorney who can guide the family in planning for the future, and creating the needed documents.

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How Do I Discuss My Parents’ Long-Term Financial Goals With Them?

A recent study by Ameriprise Financial found that more than one-third of adult children say they haven’t had a conversation about their parents’ long-term financial goals. Even though discussing this delicate topic may seem uncomfortable, addressing it now can help avoid challenges and uncertainty in the future. To that end, the Ameriprise Family Wealth Checkup study found that those who talk about money matters, feel more confident about their financial future.

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Beneficiary Designations and Your IRAs

If you’re like most people, you opened that IRA many years ago. You may not have any idea who you named as your beneficiary. If you have a copy in your files, there’s something you need to do, says The Mercury News in the article “No beneficiary designation for an IRA? Here’s what can happen.” It’s time to dig into your records and take a look.

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The Conversation with Your Doctor, Estate Planning Lawyer and Family Members

Everyone needs to have an annual checkup, taking stock of their health with their primary physician and making sure that everyone is on the same page when it comes to instructions for health care and an advanced healthcare directive, also known as a living will. When people sign their last will and testament, everyone breathes a big sigh, says The Huntsville Item’s article “Make sure you talk to your doctor and family.” But that’s not the end of estate planning.

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Who Will Inherit the Family Home?

Here’s a scenario that happens often. A man receives an inheritance, and he decides to use it to purchase the family home outright. His wife has signed a quitclaim deed to put the property into her husband’s trust. The understanding was that if the husband died before the wife, she would be permitted to stay in the home until her own death. The problem, says The Washington Post in this recent article Make sure you and your spouse are on same page on who will inherit your home,” is that the husband never signed the living trust.

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When Does a No Contest Clause Make Sense?

It’s an emotionally charged decision. Parents who sit down with an estate planning attorney would much rather talk about their grandchildren and how much they are looking forward to retirement.

However, then the discussion turns to how they want to distribute their assets, as reported in the article “Why is it called a ‘No Contest’ clause?” from The Daily Sentinel, and a problem is revealed.

The parents share that there is a family member, an adult child, who has never been part of the family. Usually they have had a troubled past, pushed others in the family out of their lives and it’s heartbreaking for all concerned.

The discussion then moves to determining how to handle that individual with respect to their estate plan. “Do you want her to be part of your estate plan?” is the least judgmental question the attorney can ask. In many cases, the parents say yes and say they’ll keep trying to foster some kind of relationship, no matter how limited. In other cases, the answer is no.

In both cases, however, the concern is that the difficult child will fight with their siblings and take the battle to court. That’s one of the reasons to include a no contest clause.

As long as estate planning documents are prepared correctly and signed, they will survive a legal contest. However, putting in a no contest clause creates another barrier to an estate battle.

The no contest clause is intended to act as a strong deterrent for those individuals who believe they are entitled to more of the estate. It makes it clear that any challenges will result in a smaller portion of the estate, and possibly no inheritance at all, depending upon how it is written.

Both parents need to have a no contest provision included in their wills. The message is clear and consistent: these are the estate plans that we decided to create. Don’t try to change them.

For families with litigious family members or spouses who married into the family and feel that they are not being treated fairly, a no contest clause makes sense to protect the wishes of the parents.

Speak with an experienced estate planning attorney about how a no contest provision might work in your situation. If your family doesn’t need such a clause, count your blessings!

Reference: The Daily Sentinel (Aug. 10, 2019) “Why is it called a ‘No Contest’ clause?”

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Why Don’t Parents Talk about Money?

Parents talk with their children during various stages of their lives about the challenges ahead. The tough talks about sex, drugs, drinking, driving, bullying and mental health are understood as a necessary part of good parenting. However, why, asks The New York Times, don’t they talk to their children about money? The answers are presented in the article “4 Reasons Parents Don’t Discuss Money (and Why They Should).”

Two-thirds of Americans with at least $3 million in investable assets have not spoken with their children about their wealth—and say they never will. This was the surprise conclusion from a Merrill Private Wealth Management study of 650 families. Some said they didn’t because they figured the kids had already figured it out. However, 67% of those respondents had made gifts in a trust or set aside money in their children’s names to pay for school, buy a home or help them out with income. Ten percent steadfastly said they won’t talk with their kids about money, saying it’s no one’s business.

Why are parents so reluctant to have the “money talk” with their kids?

The Motivation Factor. Parents are concerned that knowing about an inheritance will destroy a child’s motivation. They think if they don’t say anything, the kids won’t know about the inheritance.  However, children are smarter than that. They know how to find out the value of their homes, the cars their parents drive and how much vacations cost. For prominent parents, there may be all sorts of information online about their assets. By second grade, children who go to their friend’s houses have a pretty accurate read on wealth levels. Education about money should start when they are in nursery school, not when they are 24 and asking for a new car.

Not Knowing What to Say. Parents have certain markers for certain conversations with their children. When they are able to get a learner’s permit, we talk with them about driving, drinking and safety. When it is clear that they are becoming teenagers, we talk with them about sex, personal safety and responsibility. However, there’s no set time to have a conversation about money, and few guidelines. Do you start with a conversation about family values and the responsibility the wealthy have towards the community? Should you explain how the household runs and where the money comes from? Or, should they get a better understanding of what it took to amass the family’s wealth, and what strategies are in place to protect and grow that money?

You may not need to educate an 8-year-old on buying stocks, but they should certainly understand the value of their allowance. On the other hand, an 18-year-old is old enough to understand where the money came from and what the family’s values and expectations are.

No One Had the Talk with You. One of the survey respondents shared a very personal story: she had started talking with her children about the family’s money when they were young, but she herself did not know how much money the family had. She found out only much later when the children were older, when she learned that a share of her husband’s business had skyrocketed in value, as had several of his other businesses. Since then, the family has held annual meetings with the children to talk about their feelings about money and how it can be used to help and hurt.

Money is New to Your Family. Families that come from multiple generations of wealth have succeeded in passing wealth to the next generation, because of the conversations that have gone on for years. Those who talk early and often about wealth with their children do far better than those who keep silent. The families follow this key three step process: educate the children about finances and wealth, communicate the family’s values and hire very good advisors.

Reference: The New York Times (Aug. 2, 2019) “4 Reasons Parents Don’t Discuss Money (and Why They Should).”

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Dissolving the Mystery of Probate

Probate can be avoided with proper estate planning, or certain assets can be placed outside of the probate process.

The Street’s recent article on this subject asks “What Is Probate and How Can You Avoid It?” The article looks at the probate process and tries to put it in real-life terms.

Probate is an estate planning process that works within a probate court with a probate judge presiding over the proceedings. Usually, surviving families and other interested parties initiate a probate process, to address issues relating to the deceased individual’s estate settlement. These include:

  • The handling of the deceased’s valid will;
  • Properly citing and categorizing the deceased’s assets;
  • Appraising the deceased’s estate and property;
  • Paying off any of the deceased’s existing debts; and
  • Distributing the deceased’s property to those directed by the will (or, if there’s no will, the probate court will direct the distribution of estate assets, according to the laws of intestacy).

The executor handling the deceased’s estate will typically start the process. Here are the basic steps:

File a Petition. The estate’s executor will file a request for probate in the county where the deceased resided.  The court will then assign a date to confirm the executor and, once that is done, the probate judge will officially open the probate case.

Notice. The executor must send a notice that the deceased’s estate is officially in probate to all applicable beneficiaries, heirs, debtors and creditors.

Inventory Assets. The executor will then collect, list and present a value for all of the deceased’s assets and supply this to the probate court.

Pay the Bills. The executor will need to pay all outstanding debts owed by the estate after receiving Court approval.

Complete Any Tax Returns. The estate may also have existing tax returns that need to be filed. An accountant can be hired by the estate to work on this, or the executor may choose to file the taxes on his or her own.

Pay the Heirs. The executor can now distribute the remainder of the estate to any heirs, according to the will’s instructions.

Close the Estate. Finally, the executor will file paperwork with the court and file to close the estate.

An experienced estate planning attorney licensed to practice in your state will be able to explain what strategies are used to avoid probate, how to remove certain assets from the process, or whether it needs to be avoided at all. In some cases, probate is swift, but often it is long and tiresome. A local estate planning attorney is your best resource.

Call us (228) 460-5243 or email us at info@perklawgroup.com to find our how your probate attorney can help you.

Legal disclaimer: The information in this article is provided for information purposes only and should not be construed as legal advice. Your should not act or refrain from acting on the basis of any content included in this article or on our website (www.perklawgroup.com) without seeking legal or professional advice.

Reference: The Street (July 29, 2019) “What Is Probate and How Can You Avoid It?”

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How Do Trusts Work in Your Estate Plan?

A trust can be a useful tool for passing on assets, allowing them to be held by a responsible trustee for beneficiaries. However, determining which type of trust is best for each family’s situation and setting them up so they work with an estate plan, can be complex. You’ll do better with the help of an estate planning attorney, says The Street in the article “How to Set Up a Trust Fund: What You Need to Know.”

Depending upon the assets, a trust can help avoid estate taxes that might make the transfer financially difficult for those receiving the assets. The amount of control that is available with a trust, is another reason why they are a popular estate planning tool.

First, make sure that you have enough assets to make using a trust productive. There are some tax complexities that arise with the use of trusts. Unless there is a fair amount of money involved, it may not be worth the expense. Once you’ve made that decision, it’s time to consider what type of trust is needed.

Revocable Trusts are trusts that can be changed. If you believe that you will live for a long time, you may want to use a revocable trust, so you can make changes to it, if necessary. Because of its flexibility, you can change beneficiaries, terminate the trust, or leave it as is. You have options. Once you die, the revocable trust becomes irrevocable and distributions and assets shift to the beneficiaries.

A revocable trust avoids probate for the trust, but will be counted as part of your “estate” for estate tax purposes. They are includable in your estate, because you maintain control over them during your lifetime.

They are used to help manage assets as you age, or help you maintain control of assets, if you don’t believe the trustees are not ready to manage the funds.

Irrevocable Trusts cannot be changed once they have been implemented. If estate taxes are a concern, it’s likely you’ll consider this type of trust. The assets are given to the trust, thus removing them from your taxable estate.

Deciding whether to use an irrevocable trust is not always easy. You’ll need to be comfortable with giving up complete control of assets.

These are just two of many different types of trusts. There are trusts set up for distributions to pay college expenses, Special Needs Trusts for disabled individuals, charitable trusts for philanthropic purposes and more. Your estate planning attorney will be able to identify what trusts are most appropriate for your situation.

Here’s how to prepare for your meeting with an estate planning attorney:

List all of your assets. List everything you might want to place in a trust: including accounts, investments and real estate.

List beneficiaries. Include primary and secondary beneficiaries.

Map out the specifics. Who do you want to receive the assets? How much do you want to leave them? You should be as detailed as possible.

Choose a trustee. You’ll need to name someone you trust implicitly, who understands your financial situation and who will be able to stand up to any beneficiaries who might not like how you’ve structured your trust. It can be a professional, if there are no family members or friends who can handle this task.

Don’t forget to fund the trust. This last step is very important. The trust document does no good, if the trusts are not funded. You may do better letting your estate planning attorney handle this task, so that accounts are properly titled with assets and the trusts are properly registered with the IRS.

Creating a trust fund can be a complex task. However, with the help of an experienced estate planning attorney, this strategy can yield a lifetime of benefits for you and your loved ones.

Call us (228) 460-5243 or email us at info@perklawgroup.com to find our how your estate planning attorney can help you.

Legal disclaimer: The information in this article is provided for information purposes only and should not be construed as legal advice. Your should not act or refrain from acting on the basis of any content included in this article or on our website (www.perklawgroup.com) without seeking legal or professional advice.

Reference: The Street (July 22, 2019) “How to Set Up a Trust Fund: What You Need to Know”

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