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Inherited IRAs

May 14, 2012

In an attempt to raise what would have amounted to literally billions of dollars of additional tax revenue, the Senate finance committee recently floated a proposal that would make it compulsory to empty an inherited IRA account within five years of a benefactor’s death. Holders of inherited IRAs, who can spread taxable distributions across their anticipated lifespan, would have been forced to pay taxes over that five-year period instead. Thankfully, the measure failed, because it would have significantly upended a big piece of the estate-planning system and resulted in a serious disruption in the way a large number of retirement accounts were handled and passed on to younger generations. The Senate’s action is a good reminder, however, that inherited IRA accounts are a complicated topic: something that far too many people still manage to not take full advantage of as a result of clerical errors or avoidable mistakes. While there are a number of ways to minimize the chances that an inherited IRA does not become problematic for your family, the vast majority of issues could be avoided if we follow these basic guidelines:

  • Do not name a trust as a beneficiary–be sure to identify a specific inheritor by name. In general, make sure that you title the account correctly (including having the full name of both the account holder and the beneficiary); and

  • The smartest decision of all might be to simply keep the IRA out of a trust entirely, ensuring that there is no confusion or technical complications.

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This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. Please consult with a professional specializing in these areas regarding the applicability of this information to your situation.

Andrew Wood, Dan Simon and Alison Slezak are Investment Advisor Representatives. Advisory services are offered through CoreCap Advisors, LLC., a Registered Investment Advisor. CoreCap Advisors, LLC and Daniel A. White & Associates, LLC are separate & unaffiliated entities. 

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