Tillem & McNichol

Len Tillem and Rosie McNichol

Dear Len & Rosie,

My father recently died, survived by me and my brother. My dad has about $190,000 in an IRA. My brother and I are equal beneficiaries.

What is the tax liability?

Is probate required and can any money be gifted by us to our children to avoid taxes?

Or, must all the money be re-invested? I am in quite a bit of debt and my half could certainly get me out of debt.

Lois

Dear Lois,

Your father did exactly the right thing with his IRA by naming you and your brother as his designated beneficiaries.

His IRA will avoid probate, and you and your brother will have the opportunity to stretch out IRA distributions to spread out your tax liability.

You need to contact each IRA custodian and provide them with a copy of your father’s death certificate. They will send you and your brother beneficiary claim forms.

You can cash in your share of your father’s IRA in one of three ways.

Option 1 is to cash in the IRA all at once or over a five-year period.

Option 2 is to cash in the IRA as if you were standing in your father’s shoes. If he was under age 70 1/2, you can defer taking distributions until he would have turned 70 1/2, and your distributions would then be calculated by checking your father’s age against an IRS life expectancy table.

Option 3, which is best for most beneficiaries, is to roll your father’s IRA into Inherited IRAs for you and your brother.

With an Inherited IRA, your annual distributions will be based on your age, not your father’s, so you can take out much less than he would have each year,

Every dollar in a traditional IRA is subject to income tax when it comes out. The power of an Inherited IRA is that you have a measure of control over when you pay this income tax liability.

Consider the higher income tax bracket you will be subjected to if you cash in your $95,000 share of your father’s IRA all at once. The goal is to hold on to an Inherited IRA as long as you can.

You will be required to take annual minimum distributions based on your age, starting on Dec. 31 of the year following the year of your father’s death.

You will not be limited to taking annual minimum distributions. If you want to take out more money to pay down your debts, you may do so at any time.

Just remember that you will have to pay income tax on every dollar you remove from your IRA. And since you and your brother will have separate Inherited IRA’s, you may each make your own decisions as to what to do with your shares.

We urge you and all our readers to personally verify whom you have designated as beneficiaries on each of your retirement accounts.

If you set up your IRA long ago, you may not remember whom you named as beneficiaries. You wouldn’t want your children to realize in shock that your sister got all the money because you didn’t bother keeping your IRA up to date.

Without verification, you may not have any beneficiaries at all. An IRA, 401(k), or other retirement account without a designated beneficiary cannot be rolled over upon your death, either by spousal rollover or rollover to an Inherited IRA, and it will be subject to probate as well.

Finally, do not name any trust as a retirement account beneficiary unless you clear it with a trusts and estates attorney first.

Under some circumstances, trusts cannot rollover retirement accounts into Inherited IRA’s.

If your retirement accounts are valuable, don’t guess. Verify.

Len & Rosie

Len Tillem and Rosie McNichol are elder law attorneys. Contact them at 846 Broadway, Sonoma, CA 95476, by phone at 707-996-4505, or at LenTillem.com. Len has a new video channel on YouTube.

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