November 29, 2017

Passing on an IRA is different from stipulating another piece of property in your estate planning materials like a will to pass on to someone else if something happens to you. IRAs are managed differently and there are a complex set of regulations involved in this process. 

There are a few different ways that IRAs may surprise you in terms of how they are classified and how they impact your beneficiaries. These include:

•       IRA beneficiaries may be eligible for particular tax breaks that are often missed.
•       IRAs are distributed in a different manner than any other asset, both after death and during life.
•       IRAs cannot be jointly owned or change ownership during the life of a person who manages it.
•       An IRA may require a unique and separate estate plan.
•       The investment gains inside an IRA do not always have to be subject to the 3.8% investment income surtax.
•       An IRA passes on to someone else by contract rather than by a will.

Depending on the estate in question, the IRAs could be subjected to double tax at death; an estate tax and an income tax.

The deductions available to IRA beneficiaries are easy to overlook because it requires the coordination of tax planning between the settling the estate and the IRA beneficiary. It is valuable for both of these entities to work together to identify tax saving opportunities. The distributions from an inherited IRA could be taxable to the beneficiary. However, it is a good idea to explore tax planning opportunities well in advance to avoid this situation, if possible.