Attorney & Mediator
Attorney & Mediator

IRA’s and How to Handle

Clients are often confused about the manner of passing along IRA accounts upon their death to their family.  Heirs are confused about how to withdraw the assets.

If you are married and name a spouse as the primary beneficiary of the IRA, he or she can roll it over into his or her own name.

If you are not married, it is important to understand the rules.  If you leave it to your estate, it will be paid out in a lump sum and taxes will be due and owing by the estate.  It is much wiser to name individual beneficiaries.  In that way, the beneficiaries will have the maximum amount of flexibility for withdrawal.

If you name, for instance, you children as the beneficiaries, they will be obligated to start withdrawals from the account by December 31 of the year following the year they inherited the IRA.  The benefit is the fact that they can stretch the amount of time they will have to withdraw the IRA.  The Required Minimum Distribution (RMD) that they will have to take each year will be based upon each of their life expectancies.  In this way, they can stretch the IRA withdrawals over their lifetimes.  They can, however, withdraw more in any given calendar year if they chose.

While gifts and inheritances are not income, and thus not taxable, to the individual receiving the gift or inheritance, this is not true in the case of IRA’s.  Since no income tax was paid initially by the owner of the IRA prior to placing the money into the account, the amounts withdrawn are taxable.  This is true whether the money is withdrawn by the original owner of the account or by a beneficiary.

These rules do not necessarily apply to 401K and other employer established or funded plans.  The manner of distribution will ultimately be controlled by the employer who established the fund.  It is possible that children can stretch out the payments; however, this is not always true.  The beneficiaries may have to transfer his or her share of the inherited 401K into an IRA.  It is important to ask your employer or plan administrator.

Estate Planning – Have you checked your beneficiaries lately?

As people come in to begin their estate planning, one of the issues we take a look at is whether they have beneficiary designations in place for any of their insurance, IRA’s or other assets.

What we often find is that these beneficiary designations were made years ago and have not been updated to reflect current choices.

For Life Insurance – pull out those policies and look to see who you named as the beneficiary.   Is it your ex-spouse? Your parents (prior to marriage)? Your parents (even though you now have adult children)?

People often forget this important issue when they have life changing events. Often after the death of a spouse, the survivor will update many things, but forget to change the beneficiaries on life insurance and IRA’s. Sometimes when a beneficiary dies, we are too overcome with grief initially to address this legal issue; then life moves forward and we forget.

Unintended consequences can result if we forget to address this issue. Life insurance is a contract and it passes outside of your Will or Trust. It is not controlled by the provisions of those estate planning documents.

If you pass away and your ex-spouse is on your life insurance, he or she will get a remarkable bonus that was unexpected and unintended.

If you pass away and your parents are still named as beneficiaries, they get the money, even if your spouse and children need the money. If your parents have passed away, the insurance company may insist on making the check payable to your parent’s estate. In that case, an estate will have to be opened in Probate Court simply to process this check, years after they have passed away.

Don’t permit unfortunate consequences to occur – check your beneficiary designations today – make certain that the right people will receive the amounts you intended.