Do you have an IRA that you are leaving to someone in your estate plan or are you inheriting an IRA from someone?

Do you have an IRA that you are leaving to someone in your estate plan or are you inheriting an IRA from someone?

Properly designating your IRA beneficiary is a critical part of your estate plan.

When you open any traditional IRA, you should complete and sign a beneficiary designation form that will state who you want to receive that asset upon your death. All IRA assets will pass directly to the person(s) you named on the beneficiary designation form and upon your death the proceeds will not have to go through probate. The beneficiary form is a key component in your estate planning. The most common beneficiary designations are spouses, children, grandchildren or other loved ones. You also may name a trust, a charity, or a combination of individuals, trusts or charities. IRA owners often make the mistake of not designating a beneficiary or failing to update - their beneficiary form after the person they named as a beneficiary passes away.

If you are receiving an inherited IRA we want you to know about a recent United States Supreme Court ruling*. In that ruling, the Court held that inherited IRAs are not exempt in bankruptcy. That means if you have an Inherited IRA and you have to file bankruptcy, the bankruptcy estate will take the money in the IRA to pay your creditors. Both traditional and Roth IRAs, where you contributed the money (rather than inherited the money), are considered "retirement accounts" and are exempt if you have to file bankruptcy (meaning you get to keep it). This is an important ruling by the Court as it potentially affects anyone who inherits an IRA.

If you are inheriting an IRA you will have some choices, depending on who you are inheriting the IRA from. If you are inheriting the IRA from your deceased spouse, you have the choice of either rolling it over into your own IRA, or keeping it as an inherited IRA subject to inherited IRA rules, which are: an owner of an inherited IRA must elect to either withdraw the entire account balance within five years of the original owner's death, or take minimum distributions on an annual basis. Distribution of funds from an inherited IRA have nothing to do with the age of the recipient. Also an owner of an inherited IRA may never make contributions to the account.

IRAs are often the largest asset in many estates. Be sure your beneficiaries have the information they need to make the right decisions and also have the proper estate planning documentation. Please contact our office at 480.630.6424 to schedule a free ½ hour estate planning consultation, in order to avoid complications with passing down your IRA or running into complications if you inherit an IRA.

*Clark v. Rameker 573 U.S. ___ (2014)

Categories: Estate Planning

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