IRA

Navigating the assets of a decedent may be one of the last things on your mind after a loved one’s death. It is not uncommon for family members to be entirely unaware of what the decedent owned and where these assets are located. 

When determining the assets, there may be tangible and intangible assets that were owned by the decedent. The focus of this article will be on a common asset that gets passed on after the death of a decedent, the Individual Retirement Account (IRA).  If funds remain when the IRA owner dies, these funds will be paid to the beneficiary of the IRA.

If the beneficiary of the IRA is the surviving spouse, then he/she can treat the inherited IRA as their own. Assuming that you may be a beneficiary (as an individual) of an IRA and you are not the surviving spouse, there are many ways to pay out the retirement plans that may have significant tax consequences.

Determining the Distribution of Funds

If you are a Florida resident and the beneficiary of an IRA, then you are already in good shape.  Florida has strict statutory rules that protect IRA holders and their beneficiaries from creditors. While many other states do not specifically protect inherited IRAs from creditors, there is a specific Florida IRA exemption statute that affords Florida residents extra asset protection.

Next, the beneficiary must determine if the IRA owner died before, or on or after the required beginning date.  The required beginning date for a traditional IRA is April 1 after the traditional IRA owner’s 70 ½ year. Roth IRA owners are not required to take minimum required distributions so the IRA owner’s age of death is irrelevant.

If the IRA owner died before the required beginning date, the funds may be distributed according to the five-year rule.  This requires the beneficiary to deplete the account by December 31 of the fifth year following the IRA owner’s death. Otherwise, the IRA funds may be distributed according to the life-expectancy rule. The life-expectancy rule dictates that the beneficiary must take funds over a period not longer than the beneficiary’s single life expectancy.

If the IRA owner died on or after the required beginning date, the beneficiary can use the younger of the beneficiary’s age or the owner’s age in the year of death for their distributions.

It is important that these payments be spread out during the life of the beneficiary to prevent the acceleration of the income tax liability.  To also prevent large income tax in a given year, try to avoid lump sum payments, if possible. Please remember that any distributions made from an IRA would lose its creditor protected status.

Contact Top Boca Raton Estate Attorneys Today

If you have any questions or comments regarding the contents of this article, or any other questions regarding broader estate planning, please contact Morris Law Group and talk to one of the qualified and experienced attorneys in our office.

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