What to Do with an Inherited IRA

October 12, 2021

When a parent dies, knowing what to do with an inherited IRA can be the difference between an inheritance and a tax disaster for their adult child. Many people take the money from the IRA account and place it into their own IRA. However, that’s a mistake, says the article “How to manage an inherited IRA from a parent” from Sentinel Source.com.

Any inherited IRA, whether it’s from a parent, sibling, or friend, cannot be simply rolled into your own account or treated as if it’s your own IRA. Instead, the assets must be transferred in a timely manner to a new IRA that must be titled as an “Inherited IRA” that includes the name of the deceased owner and the phrase “For the benefit of…” and your name. Different financial institutions may have small variations in how they title the account. However, this seemingly small detail is critical.

If a traditional IRA has more than one beneficiary, it must be split into separate accounts for each beneficiary. Each heir will treat their own inherited portion in the same way, as if they were the sole beneficiary.

It’s the heir’s choice to either set up a new Inherited IRA Beneficiary account with a financial institution or advisor of their own, or to create a new account using the prior institution. Sometimes using the same firm that held the account is easier, as long as the correct title is used.

The new owner of a Beneficiary IRA needs to know the rules to avoid costly penalties. After the SECURE Act became law in December 2019, most beneficiaries are now required to deplete an inherited IRA within ten (10) years of the original account owner’s death. This applies to any inherited IRAs where the owner has died after December 31, 2019.

The prior rules allowed Inherited IRAs to be depleted over the lifetime of the beneficiary, which allowed the accounts to grow tax-deferred and in many cases, be passed to a third generation, often referred to as “Stretch IRAs.” This option is gone.

There are no limits as to how much or how often withdrawals can be taken from the account, as long as it’s depleted in ten years. However, the withdrawals are taxable as regular income, so if you wait until the ten year mark and take out the entire amount, you’ll end up with a hefty tax bill.

There are exceptions to the withdrawal rule. A surviving spouse, a minor child, a disabled or chronically ill beneficiary, or a beneficiary within ten years of age of the original IRA owner may have a little more time to withdraw funds (and pay taxes on the withdrawals).

If inheriting an IRA from a spouse, you may transfer the IRA balance into your own account and delay distributions until age 72.

Consider your IRAs carefully when working with an estate planning attorney on the distribution of your assets. Will your heirs know what to do with an inherited IRA? Will they be able to pay the taxes on their inherited IRAs, or should they be converted to Roth IRAs to relieve heirs of a future tax burden? These are questions that your estate planning attorney will be able to address.

If you would like to learn more about IRAs, and other retirement accounts, please visit our previous posts.

Reference: Sentinel Source.com (Sep. 18, 2021) “How to manage an inherited IRA from a parent”

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Plan Carefully before withdrawing Retirement Funds

September 29, 2021

As much as 70% of your retirement funds could evaporate after income tax, estate and state taxes, says a recent article titled “9 smart ways to withdraw retirement funds,” from Bankrate.com. While this number may sound extreme, a closer look shows how easily it could happen, even to families who are well under today’s high federal estate tax exemptions. It is wise to plan carefully before withdrawing retirement funds. Here’s how to avoid this minefield.

Watch the rules on RMDs—Required Minimum Distributions. Once you turn 72, you’re required to start taking a minimum amount from tax-deferred retirement accounts, including traditional IRAs and 401(k)s. The penalty for failing to do so is severe: a 50% excise tax. If you get the math wrong and don’t take out enough money, the penalty is just as bad. Let’s say your RMD is $20,000 but somehow you only take $5,000. The IRS will levy a $7,500 tax bill: half the $15,000 you were supposed to pay. Ouch!

When you calculate your RMD, remember it changes from year to year. The RMD is based on your age, life-expectancy and account balance, which is the fair market value of the assets in your accounts on December 31 the year before you take a distribution.

Take withdrawals from accounts in the right order. Which retirement funds should you withdraw from first? A Roth IRA will be tax free but use taxable accounts first and leave the Roths for later. Here’s why.

If a 72-year-old person takes $18,000 from a traditional IRA in the 24% tax bracket, their tax bill will be $4,320. The same withdrawal from a Roth IRA won’t create any tax liability. However, if they leave the Roth alone and earn 7% annually on the $18,000 for another ten years, it could grow to $35,409, which will also be tax free when withdrawn. It’s worth the wait.

Do you know the way to take distributions? Most Americans have had several jobs and have retirement accounts in different institutions. It may be time to consolidate assets into one IRA. This can make it much easier to calculate future withdrawals, tax liabilities and asset allocation. Plan carefully before withdrawing, you may need help from your estate planning attorney. You can’t take withdrawals from an IRA to meet RMD requirements for 403(b)s, 401(k)s or other plans. 401(k) plans may not be pooled to calculate a single RMD. Handle any consolidations with great care to avoid incurring tax penalties.

RMDs are different in some situations. If one spouse is significantly younger than the other, RMDs might be lowered. RMDs are calculated using factors like life expectancy (as determined by IRS tables). If a spouse is the sole beneficiary of an IRA, and they are at least ten years younger than you, the RMD calculation is done using a joint-life expectancy table. The amount of the RMD will be reduced according to the table.

Charitable contributions count. People aged 70½ or older are permitted to make tax free donations, known as qualified charitable distributions, of up to $100,000 to a charity as part of their RMD. This distribution does not count as income, reducing income tax to the donor. If you file a joint return, a spouse may also make a contribution up to $100,000. You can’t itemize these as a charitable deduction, but it’s a good way to minimize taxes.

Withdrawals don’t have to be cash. RMDs can be stocks or bonds, which are assigned a fair-market value on the date they are moved from the IRA to a taxable account. This may be easier and less expensive than triggering fees by selling securities in an IRA and then buying them back in a brokerage account.

Can you delay RMDs if you’re still working? If you’re still working at age 72 and continuing to fund a 401(k) or 403(b), you can delay taking RMDs, as long as you don’t own more than 5% of a company and your retirement plan permits this. Check with the 401(k) custodian or human resources to be sure this is allowable to avoid expensive penalties.

Smart money management is just as important in taking money from your retirement accounts as it is in building those accounts. Plan carefully before withdrawing retirement funds. Make informed decisions to maximize your savings and minimize taxes.

If you would like to read more about retirement accounts and estate planning, please check out our previous posts.

Reference: Bankrate.com (Aug. 31, 2021) “9 smart ways to withdraw retirement funds”

Which Trust Is Right for You?

September 21, 2021

Everyone wins when estate planning attorneys, financial advisors and accounting professionals work together on a comprehensive estate plan. Each of these professionals can provide their insights when helping you make decisions in their area. Guiding you to the best possible options tends to happen when everyone is on the same page, says a recent article “Choosing Between Revocable and Irrevocable Trusts” from U.S. News & World Report. Which trust is right for you?

What is a trust and what do trusts accomplish? Trusts are not just for the wealthy. Many families use trusts to serve different goals, from controlling distributions of assets over generations to protecting family wealth from estate and inheritance taxes.

There are two basic kinds of trust. It can be difficult to know which trust is right for you and your family situation. There are also many specialized trusts in each of the two categories: the revocable trust and the irrevocable trust. The first can be revoked or changed by the trust’s creator, known as the “grantor.” The second is difficult and in some instances and impossible to change, without the complete consent of the trust’s beneficiaries.

There are pros and cons for each type of trust.

Let’s start with the revocable trust, which is also referred to as a living trust. The grantor can make changes to the trust at any time, from removing assets or beneficiaries to shutting down the trust entirely. When the grantor dies, the trust becomes irrevocable. Revocable trusts are often used to pass assets to adult children, with a trustee named to manage the trust’s assets until the trust documents direct the trustee to distribute assets. Some people use a revocable trust to prevent their children from accessing wealth too early in their lives, or to protect assets from spendthrift children with creditor problems.

Irrevocable trusts are just as they sound: they can’t be amended once established. The terms of the trust cannot be changed, and the grantor gives up any control or legal right to the assets, which are owned by the trust.

Giving up control comes with the benefit that assets placed in the trust are no longer part of the grantor’s estate and are not subject to estate taxes. Creditors, including nursing homes and Medicaid, are also prevented from accessing assets in an irrevocable trust.

Irrevocable trusts were once used by people in high-risk professions to protect their assets from lawsuits. Irrevocable trusts are used to divest assets from estates, so people can become eligible for Medicaid or veteran benefits.

The revocable trust protects the grantor’s wishes, if the grantor becomes incapacitated. It also avoids probate, since the trust becomes irrevocable upon death and assets are outside of the probated estate. The revocable trust may include qualified assets, like IRAs, 401(k)s and 403(b)s.

However, there are drawbacks. The revocable trust does not provide tax benefits or creditor protection while the grantor is living.

Your estate planning attorney will know which trust is right for your situation, and working with your financial advisor and accountant, will be able to create the plan that minimizes taxes and maximizes wealth transfers for your heirs. If you would like to learn more about the different types of trusts available, please visit our previous posts.

Reference: U.S. News & World Report (Aug. 26, 2021) “Choosing Between Revocable and Irrevocable Trusts”

How to Handle an Inherited IRA

September 20, 2021

You can’t leave the money in an original IRA inherited from the deceased. There are several ways you can take the funds after inheriting either a traditional or Roth IRA. However, your options will be restricted by several factors. Note that failure to handle an inherited IRA properly can lead to a significant penalty from the IRS.

Kiplinger’s recent article entitled “I Inherited an IRA. Now What?” says you should understand what type of beneficiary you are under the new SECURE Act, what options are available to you and how they fit into your tax and investment profile.

There are several different ways to handle an inherited IRA. The first step after being left an IRA is getting the details about the account. This includes whether it’s a traditional IRA or a Roth IRA. Unlike Roth IRAs, traditional IRAs require the owner to take minimum withdrawals or “Required Minimum Distributions” (RMDs), when they turn 72. As a result, if the original account owner was older than 72 when they died, be certain that the RMD has been taken for the year. If not, there’s a potentially significant IRS penalty. You should also identify when the account was opened. This may exempt you from taxes later on, if you inherited a Roth IRA. It is also recommended that you verify that you are the sole beneficiary.

Spousal Heirs Can Transfer the Funds to a New IRA. Spousal heirs can transfer the assets from the original owner’s account to their own existing or a new IRA. You can do this even if the deceased was over 72 and was taking RMDs from a traditional IRA. With your existing or new account, you can delay RMDs until you reach 72. You can also complete this type of transfer with a Roth. Since these accounts don’t require RMDs, you don’t need to worry about withdrawals. This is a good option for beneficiaries who are younger than their deceased spouses and don’t need the income at that point. Transferring the funds to your own traditional IRA lets you delay taking RMDs. However, if you’d like to withdraw the funds from the new IRA before you are 59½, you’ll be subject to the 10% early-withdrawal penalty.

Spousal Stretch IRA. Spousal heirs who inherit either a traditional or a Roth IRA can transfer the assets into an inherited IRA, which is different than a spousal transfer. The original account owner’s financial institution will require you to open the inherited IRA with them, but you can also move the funds to a new institution. First, open an inherited IRA at the original owner’s institution and then open an inherited IRA at the institution to which you want to move the account. Request a direct IRA-to-IRA transfer. When titling the account, follow the format: “[Decedent’s Full Name], for benefit of [Beneficiary’s Full Name]” or “[Beneficiary’s Full Name], as beneficiary of [Decedent’s Full Name].”

Once you have a handle on the inherited IRA, you can withdraw the funds in two ways: (i) the life expectancy method is where you take annual distributions based on your own life expectancy, not the original owner’s (also known as a “stretch IRA”); or (ii) the 10-year method, where you must withdraw all funds within 10 years.

Non-Spousal Heirs Have Limited Choices. The SECURE Act of 2019 got rid of the stretch IRA for non-spousal heirs who inherit the account on or after Jan. 1, 2020. The funds from the inherited IRA – either a Roth or a traditional IRA – must be distributed within 10 years of the original owner passing away, even if the deceased person died before or after the year in which they reach age 72. There are exceptions, such as when the heir is a minor, disabled, or more than a decade younger than the original account owner. In these cases, they can withdraw the funds using the stretch IRA method.

If you’re required to take out the funds within 10 years, you don’t need to withdraw a certain amount of money each year from an inherited IRA. You can leave the funds to grow in the account tax deferred the entire time and then withdraw the funds at the end. However, if you withdraw too much in one year, it could move you into a higher tax bracket.

Lump Sum. All beneficiaries can take the funds in one large distribution, either from a traditional or Roth IRA. However, this is generally discouraged for those with traditional IRAs because they’ll have to pay income taxes on the distribution all at once and may move to a higher tax bracket.

Plan for Taxes. If you inherit a Roth IRA, you shouldn’t have to pay taxes on distributions if the original account was opened at least five years ago, or a conversion from a traditional IRA to a Roth occurred at least five years ago. Determine when the original account was opened to see if some of the distribution will be taxable. Make sure you know how to handle an inherited IRA. Talk with an estate planning attorney today.

If you would like to read more about IRAs and other retirement accounts, please visit our previous posts.

Reference: Kiplinger (Aug. 4, 2021) “I Inherited an IRA. Now What?”

Estate Planning for Same-Sex Couples

September 15, 2021

Proper estate planning can help ensure that your wishes are carried out exactly as intended in the event of a death or a serious illness, says Insurance Net News’ recent article entitled “What Same-Sex Partners Need to Know About Estate Planning.” Having a clearly stated plan in place can give clear instructions and potentially avoid any fights that otherwise might occur. With estate planning for same-sex couples, this may be even more crucial.

Your estate plan should include a will or trust, beneficiary forms, powers of attorney, a living will and a letter of intent. It’s also smart to include a secure document with a list of your accounts, debts, assets and contact info for any key people involved in those accounts. This list should contain passwords for locked accounts and any other relevant information.

A will is a central component of an estate plan which ensures that your wishes are followed after you pass away. This alleviates your family from the responsibility of determining how to divide your property and takes the guessing and stress out of how to pass along belongings. A will or trust might also state the way in which to transfer your financial assets to your children. You should also make sure your beneficiary forms are up to date with your spouse for life insurance policies, bank accounts and retirement accounts.

For same-sex couples, it is particularly important to create a clear medical power of attorney and create a living will that states your medical directives, if you aren’t able to make those decisions on your own. If you aren’t married, this will give your partner the legal protection he or she needs to make those decisions. It is important for you to take time to have those conversations with your partner, so the plans and directives are clear. You can also draft a letter of intent, which is a written, personal note that can be included to help detail your wishes and provide reasoning for the decisions.

Protecting Your Minor Children. Name a legal guardian for them in your will, in the event both parents die. Same-sex couples must make sure that both parents have equal rights, especially in a case where one parent is the biological parent. If the surviving spouse or partner isn’t the biological parent and hasn’t legally adopted the children, don’t assume they’ll automatically be named guardian. These laws vary from state to state.

Dissolve Old Unions. There could be challenges, if you entered into a civil union or domestic partnership before your marriage was legalized. Prior to the 2015 marriage equality ruling, some same-sex couples married in states where it was legal but resided in states where the marriage wasn’t recognized. If you and your partner broke up, but didn’t legally dissolve the union, it may still be legally binding. Moreover, some states converted civil unions and domestic partnerships to legal marriages, so you and a former partner could be legally married without knowing it. If a former union wasn’t with your current partner, make certain that you legally unbind yourself to avoid any future disputes on your estate.

Review Your Real Estate Documents. Check your real estate documents to confirm that both partners are listed and have equal rights to home ownership, especially if the home was purchased prior to the legalization of same-sex marriage or if you aren’t married. There are a few ways to split ownership of their property. This includes tenants in common, where both partners share ownership of the property, but allows each individual to leave their shares to another person in their will. There’s also joint tenants with rights to survivorship. This is when both partners are property owners but if one dies, the remaining partner retains sole ownership.

Estate planning for same-sex couples can be a complex process, and they may have more stress to make certain that they have a legally binding plan. Talk to an experienced estate planning attorney about the estate planning process to put a solid plan to help provide peace of mind knowing your family is protected.

If you would like to read more about planning for same sex couples, please visit our previous posts.

Reference: Insurance Net News (June 30, 2021) “What Same-Sex Partners Need to Know About Estate Planning”

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Things that do not belong in a Will

August 12, 2021

A last will and testament is the basic document of an estate plan, which is how you direct assets according to your wishes after you have died. However, there are certain things that do not belong in a will, and it’s important to know what they are. Mistakes can lead to expensive and worrisome complications, says the article “Things you should never put in your will” from msn.com.

Your will can get very specific about who receives what in the way of your personal possessions. For example, you can give your car to a family member of your choice. What you can’t do is tell the family member how they can use the car, or if she should never sell the car. Enforcing conditional wishes through a will isn’t legal, nor is it practical.

If you want to control aspects of an inheritance, the best way to this is through a trust, which allows you to set terms that are enforceable, even after you have died. A trust is a legal entity with a trustee and the law to enforce its terms. You can set goals or milestones for heirs best with a trust.

Leaving assets out of your will actually benefits family members in many regards. First, they’ll receive their inheritance faster. Upon death, your will must be reviewed and validated in a court of law in a process known as probate. Depending on your jurisdiction and the complexity of your estate, this can take months and, in some cases, years. Papers have to be filed, judges have to review your will and determinations must be made. Wills can also be contested in court, further tying up assets and slowing the process of distribution.

Putting property in a trust or having accounts that are Payable On Death (POD) will speed up the process for heirs.

Don’t put anything in a will that you don’t own outright. If you are a co-owner with someone, upon your death, the other owner will become the owner, with no need for court involvement.

Trusts are a key tool in estate planning, used to avoid probate and increase control of assets. Once property is titled into the trust, it becomes subject to the rules and directions of the trust, which are explained in detail in the trust documents. Nothing placed in a trust should be included in a will to avoid any confusion and delays.

Certain accounts and assets are payable or transferable on death. They are distributed directly to heirs, so putting them in a will is not necessary. These are accounts with beneficiary designations, typically brokerage or investment accounts, retirement accounts, pension plans and life insurance policies.

Business interests can be given through a will, but you don’t want to do this. Succession could be contested, and your business partners may be left with a big headache, instead of focusing on transitioning the business to the next generation of owners. Your estate planning attorney will be able to help create a succession plan that will align with your estate plan. The two need to work together.

Once deemed valid by the probate court, your last will and testament becomes a public document. Anyone who wants to read it, can do so. Things that do not belong in a will include any account numbers, account values, login information, passwords, or any information you would not want to be shared in public.

If you would like to learn more about Wills and Trusts, please visit our previous posts.

Reference: msn.com (July 11, 2021) “Things you should never put in your will”

Managing financial issues after death of a spouse

Managing Financial issues after Death of Spouse

August 9, 2021

Managing financial issues that arise after the death of a spouse range from the simple—figuring out how to access online bill payment for utilities—to the complex—understanding estate and inheritance taxes. The first year after the death of a spouse is a time when surviving spouses are often fragile and vulnerable. It’s not the time to make any major financial or life decisions, says the article “The Financial Effects of Losing a Spouse” from Yahoo! Finance.

Tax implications following the death of a spouse. A drop in household income often means the surviving spouse needs to withdraw money from retirement accounts. While taxes may be lowered because of the drop in income, withdrawals from IRAs and 401(k)s that are not Roth accounts are taxable. However, less income might mean that the surviving spouse’s income is low enough to qualify for certain tax deductions or credits that otherwise they would not be eligible for.

Surviving spouses eventually have a different filing status. As long as the surviving spouse has not remarried in the year of death of their spouse, they are permitted to file a federal joint tax return. This may be an option for two more years, if there is a dependent child. However, after that, taxes must be filed as a single taxpayer, which means tax rates are not as favorable as they are for a couple filing jointly. The standard deduction is also lowered for a single person.

If the spouse inherits a traditional IRA, the surviving spouse may elect to be designated as the account owner, roll funds into their own retirement account, or be treated as a beneficiary. Which option is chosen will impact both the required minimum distribution (RMD) and the surviving spouse’s taxable income. If the spouse decides to become the designated owner of the original account or rolls the account into their own IRA, they may take RMDs based on their own life expectancy. If they chose the beneficiary route, RMDs are based on the life expectancy of the deceased spouse. Most people opt to roll the IRA into their own IRA or transfer it into an account in their own name.

The surviving spouse receives a stepped-up basis in other inherited property. If the assets are held jointly between spouses, there’s a step up in one half of the basis. However, if the asset was owned solely by the deceased spouse, the step up is 100%. In community property states, the total fair market value of property, including the portion that belongs to the surviving spouse, becomes the basis for the entire property, if at least half of its value is included in the deceased spouse’s gross estate. Your estate planning attorney will help prepare for this beforehand, or help you navigate this issue after the death of a spouse.

It should be noted there is a special rule that helps surviving spouses who wish to sell their home. Up to $250,000 of gain from the sale of a principal residence is tax-free, if certain conditions are met. The exemption increases to $500,000 for married couples filing a joint return, but a surviving spouse who has not remarried may still claim the $500,000 exemption, if the home is sold within two years of the spouses’ passing.

There is an unlimited marital deduction in addition to the current $11.7 million estate tax exemption. If the deceased’s estate is not near that amount, the surviving spouse should file form 706 to elect portability of their deceased spouse’s unused exemption. This protects the surviving spouse if the exemption is lowered, which may happen in the near future. If you don’t file in a timely manner, you’ll lose this exemption, so don’t neglect this task. Managing financial issues after the death of your spouse can be overwhelming. Work closely with an experienced estate planning attorney who is familiar with complex financial issues related to probate.

If you would like to read more about issues related to probate, please visit our previous posts.

Reference: Yahoo! Finance (July 16, 2021) “The Financial Effects of Losing a Spouse”

Roth IRA a Good Choice for Retirement

July 28, 2021

While it may seem like only the ultra-wealthy benefit from a Roth IRA, this retirement tool is an excellent tax shelter that anyone can use, reports CNBC.com in the recent article “The ultra-wealthy have made full use of Roth individual retirement accounts. Here’s how you can do the same.” One of PayPal’s founders, Peter Thiel, had $5 billion in a Roth IRA as of 2019, according to a ProPublica report. It said that he used a self-directed Roth account, which allows the owner to hold alternative assets, like shares in a private company or real estate that generally can’t be placed in a regular Roth. A Roth IRA is a good choice for retirement income.

Traditional 401(k) plans and IRAs offer a tax break, when contributions are made. Taxes are paid upon withdrawal, which is supposed to happen only after a certain age when you’ve retired. By contrast, the Roth versions of the 401(k) and IRA don’t have the tax break up front—you have to pay taxes on the money or assets when making contributions—but there are no taxes paid upon withdrawal, and there are no required withdrawals, as there are with a traditional IRA and 401(k)s.

You pay income taxes on the money placed into the account, and then it grows tax free. You can take it out anytime, as long as the account has been owned for at least five years and you are age 59½ or older. Self-directed Roth IRAs permit tax-free growth and untaxed distributions plus investments can be made that are not available in regular Roth accounts.

Theil had private company shares in his self-directed Roth IRA, before PayPal was a publicly traded company. He benefited from both timing and savvy investment skills.

A self-directed Roth IRA is generally available only through specialized custodians. Brand-name financial companies don’t offer them. The custodians that hold self-directed IRAs do not manage the account or police what investments are placed into the accounts, so you’ll need the advice of a tax-savvy estate planning attorney to be sure you are following the rules. Note that there can also be valuation issues. The value of alternative assets is not as clear as publicly traded securities. You’ll need to get the value right, so you don’t break any tax laws. Once assets are in the account, you can sell them and use the proceeds to purchase other instruments in the account, all under the same tax-free Roth protection.

Even if you don’t use a self-directed Roth IRA, the standard Roth IRA yields many benefits. We don’t know what the future tax environment will be, but tax-free withdrawals in the future, combined with high-growth assets, make the Roth IRA a good choice for retirement nest eggs.

If you would like to read more about Roth IRAs and other retirement accounts, please visit our previous posts.

Reference: CNBC.com (June 24, 2021) “The ultra-wealthy have made full use of Roth individual retirement accounts. Here’s how you can do the same”

How to Distribute Inheritance to Disabled Child

July 22, 2021

A father who owns a home and has a healthy $300,000 IRA has two adult children. The youngest, who is disabled, takes care of his father and needs money to live on. The second son is successful and has five children. The younger son has no pension plan and no IRA. The father wants help deciding how to distribute 300 shares of Microsoft, worth about $72,000. The question from a recent article in nj.com is “What’s the best way to split my estate for my kids?” The answer is more complicated than simply how to transfer the stock. How do you distribute an inheritance to a disabled child?

Before the father makes any kind of gift or bequest to his son, he needs to consider whether the son will be eligible for governmental assistance based on his disability and assets. If so, or if the son is already receiving government benefits, any kind of gift or inheritance could make him ineligible. A Third-Party Special Needs Trust may be the best way to maintain the son’s eligibility, while allowing assets to be given to him.

Inherited assets and gifts—but not an IRA or annuities—receive a step-up in basis. The gain on the stock from the time it was purchased and the value at the time of the father’s death will not be taxed. If, however, the stock is gifted to a grandchild, the grandchild will take the grandfather’s basis and upon the sale of the stock, they’ll have to pay the tax on the difference between the sales price and the original price.

You should also consider the impact on Medicaid. If funds are gifted to the son, Medicaid will have a gift-year lookback period and the gifting could make the father ineligible for Medicaid coverage for five years.

An IRA must be initially funded with cash. Once funded, stocks held in one IRA may be transferred to another IRA owned by the same person, and upon death they can go to an inherited IRA for a beneficiary. However, in this case, if the son doesn’t have any earned income and doesn’t have an IRA, the stock can’t be moved into an IRA.

Gifting may be an option. A person may give up to $15,000 per year, per person, without having to file a gift tax return with the IRS. Larger amounts may also be given but a gift tax return must be filed. Each taxpayer has a $11.7 million total over the course of their lifetime to gift with no tax or to leave at death. (Either way, it is a total of $11.7 million, whether given with warm hands or left at death.) When you reach that point, which most don’t, then you’ll need to pay gift taxes.

Medical expenses and educational expenses may be paid for another person, as long as they are paid directly to the educational institution or health care provider. This is not considered a taxable gift.

This person would benefit from sitting down with an estate planning attorney and exploring how best to distribute an inheritance to his disabled child after he passes, rather than worrying about the Microsoft stock. There are bigger issues to deal with here.

If you would like to read more about inheritance and related topics, please visit our previous posts.

Reference: nj.com (June 24, 2021) “What’s the best way to split my estate for my kids?”

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Who Inherits IRA if the Beneficiary Passes?

July 14, 2021

Retirement accounts need to have beneficiary designations to determine who inherits the funds when you pass. But who inherits an IRA if the beneficiary passes? Which estate would get the IRA when a non-spouse beneficiary inherits an IRA account but dies before the money is put in her name with no contingent beneficiaries can be complicated, says nj.com in the recent article entitled “Who gets this inherited IRA after the beneficiary dies?”

IRAs are usually transferred by a decedent through a beneficiary designation form.

As a review, a designated beneficiary is an individual who inherits an asset like the balance of an IRA after the death of the asset’s owner. The Setting Every Community Up for Retirement Enhancement (SECURE) Act has restricted the rules for designated beneficiaries for required withdrawals from inherited retirement accounts.

Under the SECURE Act, a designated beneficiary is a person named as a beneficiary on a retirement account and who does not fall into one of five categories of individuals classified as an eligible designated beneficiary. The designated beneficiary must be a living person. While estates, most trusts, and charities can inherit retirement assets, they are considered to be a non-designated beneficiary for the purposes of determining required withdrawals.

Provided there is a named beneficiary, and the named beneficiary survived the owner of the IRA account, the named beneficiary inherits the account.

The executor or administrator of the beneficiary’s estate would be entitled to open an inherited IRA for the beneficiary because the beneficiary did not have the opportunity to open it before he or she passed away.

Next is the question of who inherits the IRA from the named beneficiary if she passes before naming her own beneficiary.

In that instance, the financial institution’s IRA plan documents would determine the beneficiary when no one is named. These rules usually say that it goes to the spouse or the estate of the deceased beneficiary.

If you are interested in learning more about beneficiary designations, please visit our previous posts.

Reference: nj.com (June 1, 2021) “Who gets this inherited IRA after the beneficiary dies?”

Category: Retirement Accounts

What to Do with an Inherited IRA

Plan Carefully before withdrawing Retirement Funds

Which Trust Is Right for You?

How to Handle an Inherited IRA

Estate Planning for Same-Sex Couples

Things that do not belong in a Will

Managing Financial issues after Death of Spouse

Roth IRA a Good Choice for Retirement

How to Distribute Inheritance to Disabled Child

Who Inherits IRA if the Beneficiary Passes?

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