Estate Planning With IRAs

Clients often overlook their IRA accounts when doing estate planning, as they are aware that these accounts generally have beneficiaries and do not pass under their wills.  The reality, however, is that they are and should be a very integral part of developing an estate plan.

For one thing, the value of IRAs are indeed included in one’s taxable estate and their inclusion may result in an estate tax liability at death.  Since IRAs can not be liquidated without adverse tax consequences, they are generally not the preferred method of paying estate tax obligations .

It is imperative that clients check the beneficiary designations on their IRAs.  For tax purposes, the spouse is usually the best choice of the primary beneficiary, although many factors may impact that decision.  For example, in a second marriage, it may not be one’s desire to leave their entire IRA to their new spouse, as that new spouse could subsequently change the beneficiary after he/she rolls over the IRA and then omit the children of the first deceased spouse from this inheritance.  Also, in the event there is a taxable estate, leaving the IRA to a spouse may not make any estate tax sense.  Leaving these monies to the spouse will not use up any of one’s unified credit, which may be beneficial to do in order to eliminate a tax on the death of the survivor.  Lastly, if one’s spouse is elderly and not in good health, leaving that spouse with a large IRA account may not make sense from a long-term care perspective, as it may be considered an asset (and/or income stream) of the survivor.

When engaging in estate planning, it is also very important to make sure that no minor children  or grandchildren are beneficiaries of an IRA, as a minor can not legally inherit money, thus causing all sorts of complications.  Trusts can be made the beneficiaries of IRA accounts, but special IRS rules and guidelines must be adhered to in order to accomplish this without serious, adverse tax consequences.

When IRAs constitute a significant part of one’s assets, it may make sense to take larger distributions at an earlier age, and pay the income tax, thus reducing the tax liability for the beneficiaries.

Of course, before engaging in any of the aforementioned strategies, it is essential one speak with an experienced tax attorney or consultant in order to avoid unintended, adverse tax consequences. 

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IRS Circular 230 disclosure: We inform you that any tax advice contained in this communication is not intended or written to be used, and may not be used by your or anyone else for the purpose of avoiding penalties imposed under the Internal Revenue Code.