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Inheriting relative's retirement income can cause tax problems

In an age when pensions have gone the way of cassette tapes and laser disks, many people are planning for retirement through the use of Individual Retirement Accounts, or IRAs. The advantage to these accounts is that, with a so-called simple IRA, money is placed into the account before being taxed, thus reducing the account holder's yearly taxable income by the amount saved. This money is generally invested and, hopefully, is worth much more than was originally put into it when the account holder is ready to retire. Then, the money is taxed when it is withdrawn from the account.

But what happens when the account holder dies before depleting the IRA assets? Most IRAs have forms that can be filled out indicating a beneficiary for the account in case of the account holder's death. If a beneficiary is named, that person can elect to have the payments from the account stretched out over time according to a formula that is based on the beneficiary's life expectancy. This is preferable to liquidating the account immediately, especially for large accounts, because the tax liability for the withdrawals can be spread over time.

If a beneficiary is not designated for an account here in Florida, however, the account must go into probate along with any will that exists, with all the expense and delay that process entails. Thus, IRA holders should be careful that, every time they move their IRA investments around, any new accounts created, usually designated by a changed account number, have new beneficiary designation forms filled out for them. Otherwise, heirs may end up with a big tax and probate headache.

A proper estate plan takes into account both the distribution of assets after death and planning for one's future life in the form of healthcare planning as well as planning for retirement income. As can be seen from the above discussion, many aspects of this planning can be complicated and multi-faceted. With so many factors to take into account, it is important that people explore their legal options to ensure that their estate plans are solid and legally enforceable.

Source: Wall Street Journal, "The Hazards of Inheriting an IRA," Kelly Greene, Jan. 31, 2014

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