If you are like one of many people who inherited an individual retirement account (IRA) this year, you likely have countless questions involving estate planning and taxes. While it can be a financial advantage to inherit an IRA account, there are still taxes to worry about, and making one wrong decision can raise the attention of the Internal Revenue Service. Some people decide not to make any decisions on how to handle an IRA account without first speaking with a knowledgeable estate planning attorney. It can also help to understand some vital but often overlooked rules addressing how IRA accounts must be handled.
Do Not Forget About Year-of-Death Distributions
One challenge presented by IRAs is deciding if its creator took a required minimum distribution in the year that he or she passed away. If the creator failed to take a required minimum distribution this year, the beneficiary must make sure this requirement is met. Remember, however, if the creator had not reached the age of 70 and a half by the time he or she passed away, there is no year-of-death required distribution.
Your Situation Influences How You Handle the IRA
If you inherited an IRA, you will have several options about how to handle the account. What you choose to do with your account depends on whether you are the spouse of the IRA’s creator, a minor child, 10 years younger than the trust’s creator, or disabled. If you are not in one of these categories, you are subject to different rules. If you are in this group, you can decide to take distributions over your life expectancy or liquidate the account within five years of the original owner’s death.
Fully Complete Beneficiary Forms
An incompletely filled or absent designated beneficiary form can ruin a person’s estate plan. Many people assume that they properly filled out a beneficiary form, but this does not mean that they did so. If there is no designated beneficiary or the form is not accurate and the IRA creator passes away, the beneficiary will be forced to liquidate the account within five years of the creator’s death. Rather than procrastinate, it is critical to take time to update these forms to avoid various complications.
Utilize Tax Breaks (if Available)
If an estate is subject to estate tax, the beneficiaries of an IRA will receive an income-tax deduction for the estate taxes paid on the account. This taxable income is referred to as “income in respect of a decedent.” For 2020, estates worth more than $11.58 million are subjected to estate taxes, which marks a substantial increase from the $11.4 million that the threshold was in 2019. This amount is scheduled to lower again in 2025.
Speak with a Knowledgeable Estate Planning Attorney
If you have questions about an inherited IRA account, it can help to speak with a knowledgeable attorney. Contact attorney Jim A Lyon today to schedule a free case evaluation.