Q: My mother had an IRA and the IRA beneficiary is her estate. However, her will leaves everything, including the IRA, equally divided between my sister and me. Since we were not the actual beneficiaries on the IRA, what is our best course of action to reduce tax exposure? I’ve seen a lot of documentation on how to handle an IRA if you are the beneficiary, but since the estate is the beneficiary, the attorney handling her will says it makes a difference to us. -- CS via email
A: Your lawyer is right. The rules are different when the estate is the IRA beneficiary.
In fact, there are three sets of rules for inherited IRAs. The first applies only to beneficiaries who are surviving spouses. The second applies to all non-spouse human beneficiaries -- i.e., children, siblings, friends. And the third applies to non-human beneficiaries like estates and charitable organizations.
A surviving spouse can transfer an inherited IRA into an IRA in his or her own name, and thus postpone taking taxable distributions from the account until after turning 70 and a half.
But no other heir can transfer your IRA into a new account in his or her own name. They must start taking distributions after your death. The big question is, how fast must they empty the account? A lot of money rides on the answer, since the longer they can postpone taking money out of the IRA, the longer it can keep growing untaxed.
If the designated IRA beneficiaries are human beings, they can take minimum annual distributions based on their own life expectancies. But in your case, the IRA beneficiary is your mother's estate -- and it has no life expectancy. The result:
If your mother was under 70 and a half when she died, her IRA must be emptied within five years of her death. If she was older -- and therefore already taking mandatory IRA distributions -- you and your sister can empty the account over her remaining life expectancy, as defined on the Internal Revenue Service 'Single Life' actuarial table for IRA owners. You'll find that table in the index of IRS Publication 590, which you can download at www.irs.gov.
A: Your lawyer is right. The rules are different when the estate is the IRA beneficiary.
In fact, there are three sets of rules for inherited IRAs. The first applies only to beneficiaries who are surviving spouses. The second applies to all non-spouse human beneficiaries -- i.e., children, siblings, friends. And the third applies to non-human beneficiaries like estates and charitable organizations.
A surviving spouse can transfer an inherited IRA into an IRA in his or her own name, and thus postpone taking taxable distributions from the account until after turning 70 and a half.
But no other heir can transfer your IRA into a new account in his or her own name. They must start taking distributions after your death. The big question is, how fast must they empty the account? A lot of money rides on the answer, since the longer they can postpone taking money out of the IRA, the longer it can keep growing untaxed.
If the designated IRA beneficiaries are human beings, they can take minimum annual distributions based on their own life expectancies. But in your case, the IRA beneficiary is your mother's estate -- and it has no life expectancy. The result:
If your mother was under 70 and a half when she died, her IRA must be emptied within five years of her death. If she was older -- and therefore already taking mandatory IRA distributions -- you and your sister can empty the account over her remaining life expectancy, as defined on the Internal Revenue Service 'Single Life' actuarial table for IRA owners. You'll find that table in the index of IRS Publication 590, which you can download at www.irs.gov.
Please send your
questions to [email protected]. I'm sorry I can't respond personally to every
email. Questions are only addressed online.(c) Lynn Brenner, All Rights Reserved
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