Federal statutes and regulations governing individual retirement accounts (IRAs) have changed significantly in the last few years. IRAs may represent the most significant assets you have to pass on to your family. Proper planning is essential to postpone or reduce the income tax consequences to your heirs.
A married IRA owner may designate as beneficiary their spouse, who “rolls over” the IRA at the owner’s death and postpone income taxes by extending the time to take minimum distributions. But, at the death of an unmarried IRA owner, their children cannot roll over the IRA. If they do, the entire IRA is considered distributed, generating the income tax payments sooner. Instead, the children can keep the account in the name of the deceased owner for their benefit. However, if an IRA is payable to more than one child, the IRS will use the oldest child’s life expectancy to calculate all the required minimum distributions. Owners should have the requisite instructions in place to divide the IRA into separate shares upon death so that each child can use their own life expectancy if further postponement of income tax is desired.
Some married IRA owners wanting more protection for a spouse or for children of a prior marriage, desire to have the IRA stay “in trust” after their death. While designating a trust as beneficiary is allowed, the terms of the trust must fit specific requirements to qualify for continued tax deferral. For an unmarried owner, a continuing “conduit” trust can also be used for a child, but it must contain carefully drafted language to avoid an IRS determination that the beneficiaries are not sufficiently identifiable, thereby triggering acceleration of income tax.
Simply stated, the consequences of improper planning will likely result in mandatory and taxable payout of the entire IRA over the five year period after the owner’s death.
This article only highlights a few issues involving IRAs in wealth transfer planning and is not a comprehensive analysis of the strategies that can be employed. If you have specific questions, you may call any lawyer in our estate planning group to assist you.