The Fine Print – Who Will Inherit My IRA?

Who will inherit IRA when I die

“Dear Attorney,

When I die, who inherits my IRA? Do I have to have a beneficiary? What happens if my beneficiary dies before I do? Will there be tax penalties?” – Giving IRA Away in Matthews

Dear Giving:

There are many rules and regulations applicable to the disposition of an individual retirement account (IRA) after one’s death. In short, the person(s) you have named as your primary beneficiary or beneficiaries when you set up your IRA account will inherit your IRA. You may have also named secondary beneficiaries or contingent beneficiaries in case your primary beneficiary/beneficiaries predecease you.

In my estate planning practice, I often see substantial IRA account balances.  Since it is difficult to make business decisions which may involve significant value when a loved one passes away, it is important to know that there are many laws and regulations associated with IRAs.  A mistake could result in a huge tax bill and the loss of the opportunity to take advantage of tax-deferred growth.  As in the case with all general discussions regarding tax related issues, you should consult with your tax/financial advisor in the event you are faced with the distribution of a deceased person’s IRA.

Many people inheriting an IRA desire to defer the receipt of the IRA account because of the opportunity for tax-deferred growth.  For example, you are twenty-five years old and have just inherited Uncle Charlie’s IRA.  You elect to withdraw all the IRA account.  The taxes associated with that withdrawal are immediately due and payable.  On the other hand, you can treat your inheritance as an “inherited IRA”, thereby deferring taxes while the IRA grows until you reach retirement or 70 ½ when you are required to begin withdrawals.  (Note:  there are required minimum distributions (RMDs) beginning with your inheritance of Uncle Charlie’s IRA, but the withdrawal rate would, in most cases, be based upon your age.)

The laws and regulations governing IRAs have some very basic ownership and distribution rules that must be adhered to.  A spouse of a deceased person is entitled to a tax-free transfer of the IRA of his/her deceased spouse into the surviving spouse’s new or existing IRA. Different laws apply to non-spousal IRAs, and there are important election dates associated with RMDs which should be carefully followed to avoid penalties or the loss of tax-deferred growth. For example, the failure to take an RMD could result in a penalty equal to 50% of the RMD.

The primary beneficiary of your IRA, or if applicable, your secondary beneficiary or beneficiaries named in your IRA account agreement will control the ownership and distribution of your IRA after your death. You need to identify the beneficiaries you have named by reviewing this with your IRA account administrator and by reviewing these beneficiary decisions when you have life changes, e.g., family members may be born or pass away, your marital status has changed, or your feelings about a beneficiary have changed.  If you’ve failed to name beneficiaries, your IRA will be distributed according to your will.  If there is no will, then your IRA will be distributed according to state laws applicable to persons dying without a will.  These situations may result in the loss of the opportunity for tax-deferred growth as discussed above.

You are encouraged to consult with your tax/financial advisor on a timely basis in the event you’re faced with the inheritance of an IRA and/or to make sure that your beneficiary designations reflect your present wishes covering the transfer of your IRA account at death. Schedule a consultation with F. Lee Weaver to discuss your estate plans or if you need help with your legal situation when losing a loved one.

F. Lee Weaver, Esq. is an estate planning and corporate law attorney at Weaver | Budd, Attorneys at Law.  To schedule a consultation with him, please call (704) 841-0760. The information contained in this article is general in nature and not to be taken as legal advice, nor to establish an attorney-client relationship between the reader and F. Lee Weaver or Weaver | Budd, Attorneys at Law.

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