In this episode, Tim explains the options that the beneficiary of an IRA has when the original owner passes away.
Podcast transcript:
WRVO Producer Mark Lavonier:
This podcast is part of the series Estate Planning Pro Tips, hosted by attorney Tim Crisafulli of Crisafulli Estate Planning and Elder Law PC an estate planning probate and elder law firm serving clients throughout central New York. A former school teacher, Tim explains complex legal subjects in an easy-to-understand way. The commentary focuses on the central aspects of estate planning, such as Wills, trusts, asset protection, long-term care, and probate. And now here's Tim.
Tim Crisafulli:
We're talking about options for how best to inherit an IRA. If a decedent chose to name you as a beneficiary. Throughout this discussion, remember that the rules we discuss also apply to qualified plan assets, such as 401ks and 403bs. Finally, the law regarding these types of assets changed significantly in 2020 and again in 2023. So the experiences someone may have had prior to 2020 are not likely to be the same. For those who inherit from people who passed away after that year. The great opportunity for designated beneficiaries of IRAs and qualified plans comes in the form of tax-deferred growth, specifically, by carefully choosing how you want to inherit. You can extend the amount of time that the asset continues to grow without being subject to income tax. Of course, you almost always have the option of just taking a single lump sum payment. But, keep in mind that you would have to include that in your taxable income in the year you receive it, meaning that you may cause a large tax bill to become due that could have otherwise been avoided. Your options for continuing tax-deferred growth depend on two things, your relationship to the decedent, and whether you qualify for special treatment based on certain qualifying factors. If you are the surviving spouse of the decedent, then you may receive what is called a rollover IRA. This means that a surviving spouse may treat the IRA as if that surviving spouse were always the owner. Required minimum distributions are generally not needed until after the surviving spouse attains the age of 72, and the surviving spouse can name whomever is then desired as the next designated beneficiary. It's a good option because tax-deferred growth can be stretched out for a significant period of time after the original owner dies. Also, there are strong asset protection features in place if ever the surviving spouse gets sued or requires long-term care. Next, long periods of tax-deferred growth may be available for people other than the surviving spouse who qualify as eligible designated beneficiaries. These include people who are fewer than ten years younger than the decedent, minor children, and people with disabilities. Finally, if you are neither a surviving spouse nor an eligible designated beneficiary, then you have up to ten years to remove all of the assets from the inherited IRA, thereby rendering it subject to income tax. In sum, complex choices await the designated beneficiary of an IRA or a qualified plan asset. It is important to seek guidance to ensure the best possible tax outcome.
