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Topic: Your Relative/Spouse just passed on, and you’ve recently inherited their IRA (Read 868 times) previous topic - next topic
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Your Relative/Spouse just passed on, and you’ve recently inherited their IRA

 The inherited IRA is perhaps one of the most complicated and financially dangerous circumstances in Retirement planning today, and may (inadvertently) involve navigating through estate planning, tax planning, and retirement/financial planning strategies. You should not try this at home.
An uninformed decision could cost you thousands in unnecessary taxes, and no one to hold responsible but yourself. Read on if you know someone who is dealing with the recent death of a Spouse, as your friendship in this matter can actually be measured in dollars. Or, if YOU find that you now have this circumstance in your lap…for the purpose of this article, I am only talking about the SURVIVING SPOUSE of the IRA holder – the primary beneficiary.
Very few IRA accounts are the original $2,000/yr IRA’s opened in the 80’s. Now, we have the most common format called the “Rollover IRA” and is usually the proceeds of a pension plan, 401-k, 403 b-7, or 457 TESP plan. The spouse rolled these funds into the “rollover IRA when they retired, and allowed the funds to continue growing tax deferred until the “Required Minimum Distribution” (RMD) forced distribution age of 70.5 yrs of age (which became age 72), and then age 73, and is anticipated to be age 75, or you inherited the IRA account at the passing of your Spouse, which lands you on this page. Lemme see if I can be of help…
When your Spouse set up the account, it had a beneficiary designation for a primary and contingent beneficiary. When they died, the funds was transferred to you. DO NOT roll it into your checking/savings bank account as this will cause you a big taxation mess, and the IRS won’t be very forgiving. Children or other Heirs cannot roll this over, and the greatest amount of latitude and possible choices is granted to the surviving spouse. Part of the problem is the choices are numerous, and without guidance, you may accidentally put yourself into a problem you could have avoided.

Under reg 72-t, the IRA can be annuitized using a life expectation table provided by the IRS (how thoughtful!) ;-)

Recently, the CHARM Act of 2020 changed the rules of this and created unique and dangerous circumstances for the Heirs of the account. Reg 72-t allows someone under 59 1/2 to access the funds at their attained tax bracket of taxable income plus the distribution based upon either mortality or essentially equal distributions paid over a period of years as established by the relevant IRS tables. That has been changed to a ten year window regardless of life expectation (that did allow someone to decide in what years they would take distributions (for tax planning and protections), and recently changed to ten (more or less) equal distributions
that force the Heir or recipient to expose the entire account to taxes regardless of the bracket creep it could trigger.

A solution to this event could be the use of a Charitable Remainder Uni-Trust (CRUT) that allows the donation of highly appreciated real estate, stocks or IRA accounts. The Donor(s) estblish their own legal charity Trust, and then make donations of their estate property (mentioned above) that are valued before the transfer to the Donor's own charity trust account, and then sold/liquidated inside the trust. This eliminates the taxes due and converts the sum into an income stream that is tax favored for up to 6 years while providing substantial income for 2 up to 20 years. This can be extended to numerous beneficiaries after the death of the final Donor and/or paid to a family wealth transfer trust (Irrevocable/ILIT). This also allows for the ability to fund substantial Life insurance or annuity programs to expand the sum of tax free monies available to the Heirs at the death of the last Grantor. In the last year of the Grantor - chosen payout, a substantial donation of 10% of the funded sum is paid to one or more Charities that are chosen by the Grantors. (Yes - the donation part is inescapable without the substantial wrath of the IRS, but the value received by the trust is overwhelmingly larger than the donation.

If this idea appeals to you and/or you'd like to hold a deeper conversation to expplore your possibilities? Call me today.

Sadly? The deceased cannot make plans.