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Post-Death Distributions From an IRA

If you inherited a traditional IRA you should know that you may be able to improve your tax picture by taking timely action and "reshaping" the method of sharing and distributing the IRA. In some cases, effective post-death planning simply means dividing one IRA into several. In other cases, it adjusts payouts to give all the beneficiaries the best result.

The right kind of post-death planning for an IRA depends on how the IRA owner directed that its proceeds be shared. Here are three examples:

  • Before she died, Mom designated Son and Daughter as equal beneficiaries of her IRA. Son will attain age 50 this year and wants to invest the inherited IRA in a money market fund. Daughter will attain age 44 this year and wants to invest the inherited IRA in an asset-allocation-type mutual fund. If the IRA is left as is, the payout for each child will be based on Son's life expectancy. And the siblings will find it hard to reconcile their differing investment philosophies. However, if Son and Daughter timely direct the IRA trustee to split Mom's IRA into two equal IRAs, Son's payouts would be based on his life expectancy, and Daughter's on her life expectancy. Because Daughter's life expectancy is longer than Son's, her payouts will be made over a longer period of time than his. Son can invest his half of the IRA in a money market fund, and Daughter can invest her half in the mutual fund of her choice.
  • Dad named Mom and the children as equal beneficiaries of his IRA, but the children do not need the income now. If they disclaim their interest in the IRA on a timely basis, Mom will be treated as the sole beneficiary and can elect to treat Dad's IRA as her own. This way, she can (1) name the children as beneficiaries of the IRA, (2) defer commencement of payouts from the IRA until April 1 of the year after the year in which she attains age 70½, and then (3) begin taking payouts over a longer payout period than she'd be entitled to as a beneficiary. After Mom dies, the balance remaining in the IRA will be paid out to the children. If the children don't disclaim their interests on a timely basis, Mom can't treat Dad's IRA as her own, and during her life will get only part of the payout from Dad's IRA. And payments to the other beneficiaries will be made over Mom's life expectancy.
  • Ted named his niece and his favorite charity as equal beneficiaries of his IRA. Ted died at age 69 this year. If the charity's interest in the IRA is paid out in full by September 30 of next year, the niece's share of the IRA can be paid out over her life expectancy. Otherwise, the niece's share will have to be paid out no later than the end of the year containing the fifth anniversary of Ted's death.

Note however, that the rules for inherited IRAs are complex and may have other tax implications that must be considered, such as estate taxes.

We invite you to contact Alan Ehrlich at our office with regard to the above.

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