Sunwest Trust in the video below concisely highlights some of the rules regarding Inherited IRAs. If you have any additional questions, Sunwest suggests you contact your CPA regarding your specific financial situation. Hopefully, the information provided within this video will help you have a more educated conversation with your financial planner or tax professional.
An inherited Individual Retirement Account is one in which IRAs are passed on to a beneficiary associated with a deceased account holder. The options available for the one receiving the fund will rely heavily on the relationship between the deceased plan holder and the beneficiary.
There are generally 3-types of Inherited beneficiaries of IRAs.
• Non-Spouse Beneficiary – any person other than a spouse. It can be a brother or sister, a nephew or niece, a child or grandchild. These types of beneficiaries can choose to take a lump sum distribution of the account. This can achieved through complete liquidation of the account or taking a distribution of the assets. However, the beneficiary is still liable for taxation based on the fair market value of the distributed assets. Beneficiaries can also enter a five year rule agreement where the account is divided into 5 equal amounts. The beneficiary receives 1 part annually in a span of five years. The final option is through the use of a lifetime expectancy value. The beneficiary’s age is compared to a life expectancy table which gives the final division of the account to be given throughout the life of the beneficiary.
• Spouse Beneficiary – All of the options available to the non spouse beneficiary are also applicable to spouses. However, spouses are also given the privilege of treating the IRA account as their own. Through paperwork and proper processing, a spouse inheritor would be considered a full owner of the retirement account and can do whatever they please with the account.
• Non Person Beneficiary –this can either be a family trust or a charity. The five year rule option is the only one afforded to this type of beneficiary.
All types of beneficiaries are also able to refuse or disclaim their portion of the inherited account. In this case where a primary beneficiary refuses to have any part in the account, the IRAs are then awarded to other beneficiaries indicated. If there are no contingent beneficiaries, then the Individual Retirement Accounts would go into the decedents estate.
It would seem that this would be a rare case indeed but the fact that refusal is written into the federal retirement account guidelines tells us that this does happen, however rare that may be. If you did not take the time to watch the video, please do so now. It is very brief and Sunwest Trust has provided a lot of very valuable retirement account information with regard to wills and probate.