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PartnerBlog_Photos_SheiblerThink your IRA is safe for future generations when you fill in the beneficiary form? You may want to think again. The Supreme Court recently ruled against an individual who had inherited an IRA from a family member’s estate, stating that this money was not protected from the woman’s creditors as would be the case for her own contributed IRA. We are beginning to see more issues related to IRAs and estate planning from a generation of boomers whose IRAs will comprise a larger part of their estates than we have seen previously. To help in better understanding how the law impacts estate planning decisions regarding IRAs, we have developed Four Considerations for IRAs and Estate Planning.

As the Supreme Court ruling demonstrated, simply leaving an IRA to another individual does not automatically grant the same rights and protections to the asset that it had for the original owner.

Four Considerations for IRAs and Estate Planning
While every case is different, we recommend these four rules of thumb for a starting point when reviewing an estate plan:

  1. Consider a trust as beneficiary rather than an individual as beneficiary. To protect an IRA from exposure to creditors or individual tax rates, a trust may be a better beneficiary than an individual or individuals. Had the IRA in contest in the Supreme Court case been held in a trust, it may have avoided being considered in the bankruptcy proceeding.
  2. Consider your beneficiaries. Make sure your beneficiary designations are up to date and understand what may happen to your IRA when it passes to them. IRAs are unique in estate planning because of their age-based distribution requirements and income tax impact. If you have designated a spouse or another individual as a beneficiary and that person pre-deceases you, you must inform your brokerage to update your records immediately.
  3. Consider the tax benefits of rolling over an inherited IRA. As long as your beneficiary designations are up to date (see rule No. 2 above) it does not need to be distributed in one lump sum. Your beneficiaries will not incur a penalty for early withdrawal and they will only be taxed on the amount of each distribution at their individual tax rates. A spouse may choose to roll over an IRA into their own IRA or take it as an inherited IRA. This can make a lot of difference, for example, if the surviving spouse is younger. She could take distributions without penalty from an inherited IRA before she ever touches her own IRA.
  4. Consider taking larger distributions in retirement. Instead of saving an IRA for your heirs, it may make better sense from a tax standpoint to take larger distributions during your lifetime. If an IRA is to be inherited by beneficiaries other than your spouse, the distributions may be taxed at their individual tax rates which may be higher than your tax rate. Instead, it may be more tax advantageous to take larger distributions at your lower tax bracket, even if you decide to leave the cash to your heirs through another planning vehicle.

It’s always best to consult a skilled estates and trusts attorney who can guide you through the process of creating an estate plan to properly account for all assets after your death.

Want to learn more?
Looking for more information and guidance about wills, trusts and estate planning? Please contact Taroff and Taitz at [email protected] or call 631-475-4400.

About Taroff & Taitz
Taroff & Taitz, LLP provides a wide variety of legal services to Long Island. Our attorneys have served the residents of Suffolk County for more than two decades. Comprised of attorneys, legal assistants and administrative staff, the firm provides support at various levels of legal expertise. Our resources are available to both businesses and individuals looking for experienced legal representation. The firm’s primary areas of concentration include civil litigation, creditor’s rights law, trust and estates issues, estate planning, admiralty claims, business counseling and real estate matters. For more information, please call 631-475-4400.

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