Blog - Inheriting a Non-Spouse IRA


Andrew Gipner
Lead Financial Planner

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As discussed in the last blog post, inheriting an Individual Retirement Account (IRA) can bring a great deal of complexity if everything attached is not properly planned. In this month’s blog post, we’ll be discussing Inherited IRA accounts from both a beneficiary and benefactor standpoint and a few strategies to consider. 

As you may already know, IRA accounts are not distributed in accordance with a Last Will and Testament, but rather a beneficiary designation that should be completed in conjunction with the establishment of an account (and reviewed regularly!). By having a beneficiary designation attached to the IRA, it allows the account – in its simplest form – to avoid probate and immediately go to the said person or persons listed on the designation form. Unlike inheriting an IRA from a spouse, the non-spouse beneficiary cannot roll over the proceeds of the account to his or her own IRA. 

The decision the beneficiary makes on how they would like the funds distributed could have a lasting impact on their future. When an account is inherited, in most cases, it is very advantageous for the beneficiary to take the annual required minimum distributions based on his or her age at the time they inherited the account. 

But what about situations where the beneficiary decides to take the lump sum? Let’s say that Freddy is a spendthrift and inherits his mother’s Traditional IRA. Freddy anxiously awaits the proceeds of his mother’s IRA so that he can immediately purchase a new car, condo, and a trip to Hawaii. Since the proceeds of the Traditional IRA were deferred income, Freddy now has to pay income tax on the amount in which he received from the IRA which ultimately pushes him into the highest tax bracket and causes a handful of unexpected consequences due to the tax laws. It goes without saying that the lump sum distribution Freddy received gave him more to deal with than he may have originally anticipated. 

While Freddy’s case is an extreme, there are ways in which his situation could have been avoided. By making the beneficiary of the account a trust for the benefit of Freddy, stipulations could have been set in place that would have ultimately allowed the capital in the Inherited IRA to grow and disallow him from taking all of the money at once and spending it. If the Inherited IRA is in a trust, income would still need to be distributed in accordance with his age through required minimum distributions, but the stipulations of how much he could withdraw and for what reason would be written within the trust document. More times than not, making a trust a beneficiary is a good strategy to consider for spendthrifts like Freddy or if the beneficiary of the account is a minor child. All that being said, it is highly (highly!) recommended that you discuss the stipulations of adding a trust as a beneficiary for an IRA account with your financial planner and estate planning attorney to ensure that the language within the estate documents and beneficiary designation is indeed correct. Failure to have the correct language could put the beneficiary in a situation where the account must be withdrawn in 5 years, which in-turn, could add a great deal of unwanted consequences that were never intended by the benefactor. 

Recent Reasons Why a Trust Should Be Considered as a Contingent Beneficiary 

While it has been a topic of discussion for the past couple of years, the Supreme Court recently ruled on June 12 that Inherited IRA accounts do not have the same bankruptcy and creditor protection of up to $1 million granted to Traditional and Roth IRA accounts because they are no longer –for all intents and purposes – retirement accounts (Clark v. Raemaker). This means that if a beneficiary does indeed find themselves in the midst of bankruptcy, the amount they hold in their Beneficiary IRA could be taken away by way of creditors and litigators. More than ever, even if the beneficiary is not a spendthrift or minor child, a trust should be considered. Again, before taking any action of changing the beneficiaries on your account, we recommend that you discuss everything with your financial planner and estate planning attorney. 


Disclaimer

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Longview Financial Advisors, Inc.), or any non-investment related content, made reference to directly or indirectly in this newsletter or post will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter or post serves as the receipt of, or as a substitute for, personalized investment advice from Longview Financial Advisors, Inc.. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Longview Financial Advisors, Inc. is neither a law firm nor a certified public accounting firm and no portion of the newsletter or post content should be construed as legal or accounting advice. A copy of the Longview Financial Advisors, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

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