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Caring For Generations

IRAs Pose Special Estate Planning Challenges

On Behalf of | Oct 27, 2015 | Estate Planning

When it comes to estate planning, you might say assets are assets, except when those assets are in an Individual Retirement Account.  It’s not enough, for example, to simply divide your total assets equally among your three children – at least not if some of those assets are in an IRA. The rather complex laws and rules relating to the distribution of assets out of IRAs demand special care and attention, first in setting up the account, later in distributing the assets to heirs.

Those “special problems” become even more challenging when the beneficiary of the IRA is not a person or people, but an estate.

When an IRA owner dies, it will be necessary to determine if he or she died before or after beginning to take Required Minimum Distributions.  The Required Beginning Date, or RBD, is April 1st of the year after the IRA owner reaches age 70 ½.  Suppose Elise dies after her RBD, but before having taken her distribution, and the beneficiary is her estate.  The personal representative will need to request the distribution and income tax will be owed on it.

If the named beneficiaries of an IRA are individuals, the IRA distribution period can be “stretched out” over that person’s (or over the oldest of several persons’) life expectancy. That, of course, means less tax will be paid because the distributions will be small. If the estate (or a charity) is named as the IRA beneficiary, on the other hand, the assets will need to be distributed over a five year period at the maximum.

Very often, it is the personal representative (who may also be an heir) who is turning to the attorneys at Rebecca W. Geyer & Associates for help sorting all this out.  Of course, the need for additional guidance is motivated by the desire to save on income taxes.

Will it be necessary to keep the estate open for many years if the distribution period is to be based on the deceased’s own life expectancy in order to preserve the tax deferral?  The answer is no. The inherited IRA can be distributed to the beneficiaries of the estate, using the value of the account as of Dec. 31st of the year before the transfers are made.  The beneficiary will still be required to take distributions in accordance with the applicable distribution period for the estate, but the estate itself can be closed.

IRAs can certainly pose special estate planning challenges!


– by  Rebecca W. Geyer