Monday, May 14, 2012
Inherited IRAs (Individual Retirement Accounts) can provide several benefits to those who inherit them. For example, an heir could stand to gain, through his inheritance, more money because these IRAs can increase in value throughout the course of their lifetime. It is also important to note that the funds within the IRA are not subject to the federal income tax.
Even with all their benefits, most heirs or beneficiaries who inherit IRAs choose to end the IRA and only receive the funds as a cash payout, thus losing the benefits permanently. Heirs who choose to not take advantage of the IRAs do so for a number of reasons. Some heirs simply do not know that they can keep the IRA, while others lose the opportunity through the mistakes of their financial planners.
One of the most common mistakes that a financial planner can make is for the planner to not take into consideration how the IRA will interact with a trust. Often, financial planners name the trust as the primary beneficiary of the IRA, which can be a problem because of the trust's legal status. The trust is not a person; therefore, it is not capable of taking the advantage of the IRA because it does not have a life expectancy. Therefore, it is probably not a good idea to name the trust as the beneficiary unless there are other exigent circumstances (e.g., the client's children are in prison.
There is also a problem with titling, which occurs when a new beneficiary re-names the IRA. The main problem is not re-titling of the IRA, but the failure to file the proper paperwork with the change. Also, note that if the beneficiary's estate is large enough to incur an estate tax, then the estate can obtain a deduction on the property from the IRA. Finally, a client can disclaim the IRA, which will allow the IRA to pass to that person's legal heirs.
See Kelly Greene, Inherited IRAs: A Sweet Deal, The Wall Street Journal, Apr. 14, 2012.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.