|
|
|
|
Be Alert For IRA Troubles: Part II
ast month, we examined mistakes awaiting those who inherit IRAs. This month, we turn to the second part of author Lynn Brenner's article entitled "Heir of Dismay" (appearing in the April, 1999 issue of Bloomberg Personal Finance), in which she discusses the troubles awaiting those who own IRAs.
Brenner issues six alerts. First, make sure that you name a beneficiary. If you fail to do so, in most cases this means that your estate automatically becomes your IRA beneficiary. As soon as you die, the entire IRA is subject to taxes (because your estate's life expectancy is zero). However, if this happens and you are the spouse, who is sole beneficiary of the estate and the executor of the estate, you should request an IRS private letter ruling. In the past, the IRS has allowed the spouse to roll the decedent's IRA into a spousal IRA.
Second, do not misplace your IRA beneficiary forms. These forms govern what happens to your IRA, not your will. If these forms cannot be found, the estate becomes the beneficiary by default, causing the entire IRA to be taxable at death. You should not assume that your bank, brokerage firm or mutual fund company has copies of your beneficiary forms. Request copies today, and maintain them in a secure place, side by side with your will.
Third, do not name several beneficiaries to a single IRA account. That can be costly to the youngest beneficiary, who must take accelerated distributions because the calculation is based on the age of the oldest. The same result occurs when you name your spouse and your child; your child must take distributions based upon the age of your spouse. Even worse is naming a charity as a co-beneficiary, because charities have no life expectancy. To remedy this matter, insist upon dividing your IRA into as many accounts as you have beneficiaries, even if your bank, brokerage firm or mutual fund company is reluctant to do so, because of the extra paperwork involved.
Fourth, do not necessarily name your trust as your IRA beneficiary. The IRS now allows this, if the trust becomes irrevocable at the IRA owner's death, and there are seminars all over the country urging this strategy. But consider this option carefully and with the guidance of a qualified estate planning attorney. There are many pitfalls.
Fifth, if you roll over money from your qualified retirement plan into an IRA, make sure that you obtain your spouse's (or ex-spouse's) signed and notarized consent. This is the No. 1 problem uncovered in IRS audits. Without that spousal consent, the distribution may be illegal and, as a result, it is taxable.
Sixth, remember to roll over your qualified plan assets into an IRA before you die. It is likely that IRA distribution rules, and hence tax deferral options, are more liberal than those of the plan. If you are retired, take the money out of the plan and roll it over. If you still are working, inquire of the plan as to whether you can take in service distributions, which you then would roll over. Name your children as beneficiaries, in your separate IRA accounts, thereby preserving tax deferral for a second generation.
|
Sponsored by James J. Eccleston. This Web site contains material of general interest. It is neither intended to, nor constitutes, either legal advice or investment advice.
Always consult an attorney and/or investment adviser when building and protecting your wealth.
All content Copyright © 2010 Advocate Compliance Partners, Inc. except where noted. All rights reserved.
One North Franklin Street, Suite 2620, Chicago, IL 60606
Telephone 312-332-0000 | Fax 312-332-0003
|
|
|
|
|
