Inheriting an Individual Retirement Account - Part I - Inheriting Options

One of the most common retirement vehicles that Americans utilize is the Individual Retirement Account, or IRA. Many people also have Roth IRAs and I will discuss Roth IRA's in the future. Many understand that an IRA allows for special tax deferred status for building wealth retirement. In fact, President Obama's recent 2014 budget is specifically attacking that special tax status for large IRA accounts. It is that special tax deferred status that makes estate planning very unique for IRAs and, also a concern for those inheriting an IRA.

The first issue that needs to be determined is who is inheriting the IRA. If the beneficiaries are a non-spouse, the non-spouse beneficiaries have two options for liquidating the account. The first option is to take distributions over the life expectancy of the beneficiary, known as the "stretch" option, which leaves the funds in the IRA for as long as possible. The other option is to liquidate the account within five years of the original owner's death.

If the IRA account is large enough, then the stretch IRA is the tax equivalent of finding a pot of gold at the end of the rainbow. If the minimum withdrawals are less than the annual growth, the IRA would never shrink. However, there are numerous pitfalls hidden beneath the layers of rules and red tape. One error by a beneficiary or even by the benefactor before death, and that tax savings can be lost forever. I will note that President Obama's 2014 budget proposal attempts to eliminate the "stretch option for non-spouse beneficiaries.

If there is an error, the beneficiary will be forced to take the money out of the IRA under the five-year rule. For substantial accounts, that can add up to a monstrous income tax bill and push beneficiaries into higher tax brackets and higher tax rates further exacerbating the tax consequences earned from income generated outside of the IRA distributions.

If a spouse is the person inheriting the IRA, then the spouse can essentially treat the inherited IRA exactly like they would treat their own IRA account. For example, if a spouse is under 70 and not interested in taking the money out of the inherited IRA account then the surviving spouse can let the money grow until they reach 70 and take the minimum required distributions. Spouses can also roll the inherited IRA into an account for themselves and name their own beneficiaries.

Basics of Estate Planning:Meeting with an Estate Planning Attorney

Many people feel very intimidated meeting with me, or any other estate planning attorney for the first time. Several people have told me their biggest fear is that, once they signed a will, they will pass away shortly after. But, most people feel apprehension in meeting with an estate planning attorney because the personal decisions that need to be made and the information that needs to be gathered to meet with an estate planning attorney.

To ease the situation, I have created a short list of items/steps to consider prior to meeting with an attorney:

  • Gather up all of your financial records - house title, 401(k) statements, IRA statements, annuities, pensions, bank accounts etc.
    • Reason: my advice may change depending on the types and values of the accounts.
  • Analyze those records and figure out exactly how the property is owned, who owns it, what are the names of the owners of the property.
    • Reason: People marry later in life today and family dynamics change. That means ownership and title for real estate, automobile titles, retirement accounts, life insurance, bank and brokerage accounts might not accurately reflect a family's current situation.
  • Determine who is listed as the beneficiary on your financial records.
    • Reason: For example, most of my 401(k) accounts listed my parents as beneficiary until I got married. Once I got married, I renamed my wife as beneficiary on everything. It is very important to have the correct beneficiary listed on your property because, in most cases, that determines who receives the property if the owner passes away.
  • You should sit down with your significant other and have a discussion about who you would want to raise your child if something happens to the both of you.
    • Reason: Each person might have a different idea on who is the best person to take care of your child. She might want her sister while you might want your brother
    • Questions you should consider in determining a caregiver can be found here.
  • Think of what instructions you would like the caregiver to have when raising your child
    • Reason: Each child is different and while some child-beneficiaries would studious look after their inheritance some would just as easily go out and buy a new Porsche.
  • If you have older children, and possibly grandchildren, and trying to determine how to divide up assets, and/or appoint a personal representative or trustee for your assets here are a couple of things to think about:
    • Sit down with your children and ask them what they are thinking about with regard your estate. Yes, it is an uncomfortable discussion, but a necessary one. Make sure they understand you might decide differently than what they want, but convey that you are listening to them.
    • If there are heirlooms that one child wants more than others, have a conversation about that. You could use a lottery, ranking, auctions or a number of other systems for those family items that are wanted by all the children.
    • If you want to provide more to one child than to others, you can name them personal representative and/or trustee (as long as they are trustworthy) and allow them to be paid to handle the administration of the estate. You can also just provide more to one over the other but make sure you discuss your reasoning with your children. Consider how your decision will appear from their perspective to avoid family discord in advance.
    • Think about how you want to provide for grandchildren or take into account one of your children has more children than others.
    • You can also think about disinheriting a child, but make sure you think about how that child will take it. If totally disinherited, they could sue to invalidate the will.

Estate of the Month: Reclusive Heiress Gives Insight into Estate Planning

In the last several months, the Washington Post Sunday magazine has published a couple of interesting stories that involve estate planning. The first story published on January 31, 2013 entitled "Will the Corcoran get the Monet? The Battle over an Eccentric Heiress's last wishes" and the second story published on March 14, 2013 entitled "The Rift - A family dynasty fights over the future of Luray Caverns." What I find interesting about the two stories is how the contradictory premises of not having any "true" heirs and having too many heirs can both generate huge estate problems and mountains of litigation.

This month's estate will deal with the story of Huguette Clark, and what can happen if you don't have any close heirs i.e. no spouse or children to inherit or care for you.

Huguette was the daughter of a 19th century robber baron and was the heir to an estate worth approximately $600 million at the time of her father's death in 1925. She was briefly married to her the son of her father's financial controllers from 1928 to 1930 and never had any children. For much of the 1920's, 30's, 40's and 50's, she was a very visible socialite with her name splashed across the gossip pages of the day. You could argue she was the Paris Hilton of her time - minus the reality T.V. show.

But, Ms. Clark was also a renowned patron of the arts, donating various paintings, art work and money to museums like the Corcoran. The Clark Wing of the Corcoran Gallery is named after her father - Senator William Andrews Clark

First, if you every wondered how a law professor write a law school final exam, reading about Ms. Clark's last few years life would be a case book example of a trust and estates law school final exam with her numerous estate planning issues that arise. The last few years of her life were rife with updated wills, secret wills, undue influence, gifts to inappropriate recipients, financial elder abuse. You name the estate planning issue; Huguette's estate appears to have that problem.

She signed her first will in 1929 leaving everything to her mother - Anna La Chapelle Clark (her mother died in 1963). Huguette did not write another will until March 2005. That will gave $5 million to her private nurse and the rest of her estate, estimated in excess of $300 million at her death, to be distributed pursuant to the laws of intestacy. Under intestacy, her beneficiaries would have included 21 grandchildren and great-grandchildren from Huguette's two half-sisters and half-brother from her father's first marriage.

In April of 2005, just 6 weeks after signing the second will, but over 76 years since signing her first will, Huguette signed another will. The third will created an art foundation in her seaside mansion in California from 15% of her estate plus the proceeds from the sale of all her artwork - except one Monet, valued at $25 million, that was to go to the Corcoran. The will also gifted various amounts of money to her personal assistant that assembled her doll sets ($500,000), her personal physician ($100,000), her lawyer ($500,000), her accountant ($500,000) and $1.0 million to Beth Israel Medical Center. But, it was her private nurse that was the big winner receiving the remaining 60% of her estate. You can read a breakdown of the beneficiaries in Huguette's three wills here.

Over the last few years of her life, Huguette allegedly gave away upwards of $40 million dollars to various museums, hospitals, charities and the beneficiaries in her third will. A complaint filed by the public administrator appointed to oversee the mess, alleges the private nurse received in excess of $32 million from Huguette. Because of the amount of money the private nurse received and her constant care, including spending in excess of 12 hours a day, 7 days a week with Huguette there is a strong case of undue influence and coercion on the part of the private nurse.

Now, many will ask what a regular person can be learn from an almost billionaire? Unfortunately, elder financial abuse happens all the time particularly against those that do not have any close loved ones to protect against scammers. Elderly parents hopefully have children or other close loved ones that will shield them from the less scrupulous seeking money. Adult offspring are usually more attuned to such abuse and put a stop to it. Some of that awareness is self-interest in protecting a child's inheritance but most want to protect a parent from being taken to the cleaners.

Don't get me wrong: children and spouses can commit financial elder abuse, too. See a recent story about Mickey Rooney alleging being abused by his step-children in 2011.

However, that it is not always the case for those without children or close loved ones. They might have to rely on professionals to hopefully shield them from the scam artists out here. That will mean added costs and a person having the capacity to recognize help is needed.

Financial abuse is not always so direct as the con artist knocking on the door with the get rich quick scheme. Huguette's story describes various groups, including the Corcoran, devising intricate ways to enlarge their share of the estate. I meet with many clients that are worried about their parents giving money away to organizations because their parents are inundated with flyers from groups (fake or real) seeking donations. Is the Corcoran writing a letter in French to Huguette any different than someone trying to coerce money out of a lonely elderly woman by making weekly phone calls? Given the state of the economy of the last 4-5 years financial abuse of the elderly is growing. In 2011, seniors lost $2.9 billion from financial abuse.

Good planning for those with or without children can go a long way to avoid having your estate share the abuse and legal problems in Huguette's estate.

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