The rationale behind establishing an IRA may be quite simple; however, the rules for inheriting and distributing IRA benefits upon the IRA owner’s death are anything but. Therefore, understanding the rules governing IRA inheritances, for an IRA owner as well as the named beneficiary, is critical to avoid any unintended consequences, including paying higher taxes or forfeiting asset growth.
The rules governing inherited IRA assets depend upon the beneficiary’s relationship to the original IRA owner and the type of IRA that is inherited.
When the beneficiary of inherited IRA assets is a surviving spouse, the rules are simple—the spouse has the option of rolling the assets over into his or her own IRA within 60 days of taking the distribution from the decedent’s IRA. For income tax purposes, a spousal rollover of IRA benefits is not considered a distribution and therefore has no income tax consequences. On the other hand, when the beneficiary of inherited IRA assets is a non-spouse (i.e., child, grandchild, other relative, friend, etc.), the rules become quite complicated and carry various tax consequences if not followed properly.
Unlike a surviving spouse, a non-spouse beneficiary does not have the option to roll over the IRA benefits into his or her own IRA. Rather, when a non-spouse beneficiary inherits IRA assets, the beneficiary generally has three options from which to choose. Each option carries specialized rules as well as various pros and cons, which should be considered carefully when making a decision regarding distributions:
1. Take an immediate distribution.
A non-spouse beneficiary can choose to have the inherited IRA assets distributed to himself or herself immediately. Once the assets are distributed to the beneficiary, they are treated as the beneficiary’s own, and may be used or invested as the beneficiary chooses. Although taking an immediate distribution allows greater flexibility to the beneficiary, the distribution will be included in the beneficiary’s gross income and subject to ordinary state and federal income taxes. Depending on the value of the IRA assets, the amount of income taxes due on an immediate distribution in full could be significant. Despite the potential income tax consequences, it is important to note that a beneficiary who is under the age of 59½ will not be subject to the 10% penalty for early withdrawal for the distribution of assets. If a beneficiary needs immediate access to the money, taking an immediate distribution of the entire inherited IRA may be most beneficial.
2. Transfer the assets into a non-spouse inherited IRA and take RMDs.
A non-spouse beneficiary has the option of transferring the IRA assets into an inherited IRA, sometimes also known as a beneficiary distribution account. It is important that the beneficiary complete what is known as a “trustee-to-trustee transfer,” where the assets move directly and immediately from the existing IRA account to the new, inherited IRA account. Unlike the spousal IRA rollover, there is no option for a 60-day rollover when a non-spouse beneficiary inherits IRA assets. If the assets are distributed directly to the non-spouse beneficiary, the money will be taxed as ordinary income and cannot later be transferred into an inherited IRA.
An inherited IRA account remains in the name of the decedent, and although a “new” retirement account is created, the beneficiary is not able to make new contributions to the inherited IRA account. Keeping the inherited assets in an IRA account allows the assets to continue to grow on a tax-deferred basis. Thus, if a beneficiary does not have an immediate need for the money, transferring the assets to an inherited IRA may have the greatest long-term growth benefits. Notwithstanding the asset growth advantages, a beneficiary of an inherited IRA is required to withdraw a certain amount of money each year based on his or her age and life expectancy, and also other various factors (including whether there are additional beneficiaries). These required distributions generally begin in the year after the year of death and are more commonly known as “required minimum distributions” (RMDs).
3. Disclaim all or part of the assets.
A non-spouse beneficiary can choose to decline to inherit all or part of the IRA assets by executing a disclaimer. If a disclaimer is executed, the IRA assets will pass to the contingent named beneficiaries or, in the event there are no contingent beneficiaries, pursuant to the IRA provider’s contractual defaults. The decision to disclaim IRA assets is an irrevocable decision by the beneficiary, which must be made within nine months of the original IRA owner’s death and before taking possession of the assets. Before making a decision to disclaim, the beneficiary should consult with tax and estate planning professionals to consider the potential benefits and consequences of such a decision.
Die-hard fans of football, baseball, basketball, hockey and soccer should think about what they want to happen to their season tickets as well as what limitations will be imposed by the team at the death of the season ticket holder. Transfer policies are set up on a team-by-team basis.
Examples of team policies relating to the transfer of season tickets include:
- Season ticket holder has no authority to transfer and the tickets go to a waitlist holder
- Season ticket holder completes a transfer form during his/her life, which designates who gets the tickets
- Season ticket holder can transfer tickets to a surviving spouse or immediate family member only
- Season ticket holder can designate who gets the tickets in his/her will
- Season ticket holder’s heirs, if no designation by will is made, must agree on who gets the tickets
- A transfer fee may be imposed in addition to meeting the limitations of a transfer policy
With such a wide range of transfer rules, season ticket holders should understand the team’s policy on transfer, and should not assume that the tickets will be passed to a younger generation fan.
Determining what you want to happen with your tickets, and what the team will allow to happen, can save a lot of heartache and avoid disputes among loved ones after death.
As estate planners, we ask our clients a lot of questions and answer a lot of questions to help craft an estate plan that meets the needs of the client’s family and situation. We each have our own families and our own situations that need careful thought as well. Here are some of the thoughts that we have considered as we have created our own estate plans.
Entering the work world
As someone who recently entered the “real world,” there are many new responsibilities, including maintaining an apartment, investments, health insurance, bills and taxes. As a single adult with no dependents, an estate plan seemed unnecessary initially. However, part of my new responsibilities include being prepared for the unexpected as well. Taking the time to ensure my loved ones have a clear understanding of my wishes, in the case of an unexpected event, is another responsibility I have now. Health care proxy, power of attorney and will, here I come.
I do not have an estate plan or incapacity documents (i.e., power of attorney and health care proxy), which is not good for an estate planning attorney. I do anticipate putting a formal estate plan into place in the next year or so. For now, all of my financial accounts have transfer-on-death instructions and/or beneficiary designations, which name my parents as the primary beneficiaries and my sibling as the secondary beneficiary. I do not own real estate and do not expect to be purchasing real estate any time soon either.
It’s time for me to review my own plan. My concerns are: Are my health care proxy, durable power of attorney, will and trust up to date? Do they work with the recent changes to state and federal laws? Are the agents, executor and trustee I picked still good choices? Are all my assets titled in the name of my trust so that my estate avoids the expense and delay of probate at my death? Do my life insurance and retirement plan designations still work with my plan?
As I approach my wedding date, I am thinking about updating my transfer-on-death instructions and beneficiary designations to reflect my fiancé as the primary beneficiary and my parents as the secondary beneficiaries. My fiancé and I have discussed but do not plan to sign a prenuptial agreement as neither of us has any substantial assets or expects a substantial inheritance from our parents.
Prior to getting married, my (now) spouse and I were starting our careers as attorneys. We thought, “How can we advise clients all day long that they need an estate plan when we, ourselves, do not have one?” Despite not being married, we executed our powers of attorney, living wills, health care proxies and wills. In going through the process of drafting our own estate planning documents, we realized that we had appointed people who would not have been our default agents by law. Additionally, we realized that it was even more important for individuals who are engaged (and not married) to have these documents in place. Without them, my fiancé would have had no say in my medical or financial affairs.
Starting a family
As we begin to think about starting a family, we know it will be especially important to have proper wills in place that will allow us to appoint guardians of our minor children and provide that their distributions be held in trust, for health and education purposes, rather than given to them outright.
Young and growing family
As a parent of teenagers, I am getting my first glimpses of what my children might be like as adults. This has made me consider whether I want their inheritance to pass outright to them or remain in trust for a long or short period of time. I have also reconsidered which family members to name as guardians because I feel it is now important for them to remain in the Boston area. I have also thought about whom I would name as trustee of assets because I want someone in that role who is wise financially but can also relate to my children as they mature into adulthood.
Parent of an 18-year-old
As my daughter was preparing for college, I thought about how I would no longer be able to do things for her just because I was her mother. No longer would the doctors talk to me without her permission. No longer could I handle her financial matters. It was now time for her to take over these matters herself (even if I wasn’t sure she was 100% ready). What if she was injured and couldn’t make medical decisions for herself? What if she was too far away to take care of a financial transaction at our local bank? She needed a health care proxy and power of attorney before she headed off to college.
Parent of young adult children
My kids have graduated from college and started their careers. I have made sure they have health care proxies, durable powers of attorney and wills, that they are investing in their employer-provided 401(k) and that they understand how to think about their beneficiary designations for their retirement plans and employer-provided life insurance. I also put some money in their IRA accounts every year for which they will thank me when they are my age!
I want my kids to benefit from whatever I can pass to them, not my ex-spouse. Does my plan ensure that my kids are benefitted but that no unforeseen circumstance would result in my hard-earned money passing to my ex-spouse (or an ex-spouse of my child’s down the road)? In addition, are my kids able to handle money? They are good, hardworking and kind but I am not sure they are ready (sorry kids!).
As grandparents, we look at our grandchildren’s young lives and their need for money for education, necessities and buying a home someday. In doing our estate plan, we established a trust for the benefit of our children and grandchildren. The trust gives the trustees the discretion to distribute income and principal to both children and grandchildren with the primary purpose of providing for the education and support of our grandchildren. By having the assets held in a trust, they are protected from the creditors of both our children and grandchildren, including divorcing spouses.
Married with grandkids
It is a lucky parent who does not have to worry about paying a full college tuition for four years for each child. A relatively painless and tax efficient way for a grandparent to help out is by starting to make contributions to a 529 plan for each grandchild as soon as possible after they are born. Now that such plans can be used toward the payment of private school tuitions, they provide additional flexibility if the parents are concerned about having the resources to afford both a private school and a private college.
Families needing special planning
My sibling is in recovery from serious addictions. Although our grandparents wanted to treat my sibling equally, it was important that money not be left outright to my sibling. Our grandparents updated their estate planning documents so that my sibling’s share would be held in trust with our aunt serving as trustee. With this arrangement, my sibling has access to funds, and can use the money for worthy causes in his life, but they are restricted enough that they do not pose the same risk to his sobriety as an outright distribution may have.
There are three ways to own title to real property between two or more individuals—as tenants in common, joint tenants or tenants by the entirety. How you hold title to real property with another individual is important when it comes to your estate plan and knowing what will happen after death.
Tenants in common: Each owner has a separate interest in the property. If the type of ownership is not expressly stated in the deed, and the parties are not husband and wife, this creates ownership by tenants in common. Upon the death of an owner, his or her share passes pursuant to the deceased’s will, or if there is no will, to the deceased’s heirs via intestacy laws.
Joint tenants: A joint tenancy must be specifically declared in a deed. Upon the death of a joint tenant, his or her interest automatically passes to the surviving joint tenant. This tenancy may also be referred to as “joint tenants with right of survivorship.”
Tenants by the entirety: This type of ownership is unique to married persons. Upon the death of a spouse, the property becomes owned in full by the surviving spouse. The deed should state that ownership is by “tenants by the entirety” or between “husband and wife,” although if it is silent and the parties are legally married at the time, the ownership will be automatic. Alternatively, married persons can own property as joint tenants or tenants in common, provided it is expressly stated in the deed.
Unclaimed assets are funds in an individual’s name such as bank accounts, stocks, federal or state income tax refunds, uncashed dividends, insurance premium refunds, etc. that have not been accessed or collected [a year or more after issuance] that will eventually escheat to the state as “Abandoned Property.”
We commonly see the following types of Abandoned Property: uncollected dividends, forgotten bank accounts, uncashed checks and contents of safe deposit boxes.
If unclaimed funds are located in your name, only you, your spouse (or other family member if none) or your estate is entitled to collect the money from your state’s unclaimed funds depository.
There is no central federal source to research unclaimed funds specific to you. However, the National Association of Unclaimed Property Administrators website has helpful information on each state and provides instructions on how to search for unclaimed money in your name and corresponding state.
We recommend you search the Abandoned Property website of each state in which you have resided annually. The collection process is relatively simple and most times can be done online through the National Association of Unclaimed Property Administrators
, Office of the New York State Comptroller Unclaimed Funds
, Massachusetts Unclaimed Property Division
and Illinois State Treasurer’s Unclaimed Property
While some pet owners may consider what will happen to their pets after they die, it is equally important to plan for your pet’s care during any time period when you are not able to care for your pet yourself. This time period could include unexpected extended hospitalizations or the immediate need to reside in a nursing home. Formalizing a plan for your pet’s care in such a scenario should keep your pet out of a shelter and ensure she is in good hands.
There are several ways to provide for your pet’s care during times of disability, including through a revocable trust, a pet protection agreement and by mentioning your pet in your durable power of attorney. The benefit to including instructions on your pet’s care in a durable power of attorney is that your agent will be able to immediately care for your pet by spending your resources on the pet and making sure she being cared for. Regardless of the vehicle you choose to formalize a care plan for your pet, the following are important factors to consider: 1) Select a caregiver for your pet.
With any potential caregiver, discuss what the job of caring for your pet will entail and have her meet and spend time with your pet to see if it is a good fit, much like a shelter would have a new potential owner do before adopting an animal. If you are creating a trust, the trustee is not the best option for the pet’s caregiver since that would negate the checks and balances inherent in a trust with an independent trustee. If you cannot find an individual to care for your pet, other options include finding an organization that will care for your pet either permanently or temporarily while they find your pet a new home. It is important to visit and vet these organizations as they range in quality. 2) Consider the standard of living and your pet’s expenses.
Factors to consider include regular veterinary expenses; anticipated additional medical expenses as the pet ages, such as medicine or procedures; and the cost of food, current medicine and supplies, such as cat litter, toys, petsitters, dog walkers or daycare. Additional expenses may include a stipend for the caregiver and trustee fees if you choose a pet trust. 3) Create a care plan.
Detail your pet’s eating frequency and habits, type of food and treats, toys, habits, veterinary information and records and medicine and supplements.
Once these factors have been considered, formalize your plan by selecting the vehicle by which you will provide for your pet’s care. Providing for your pet in a will, which only takes effect after you die, will be useless in caring for your pet during a time of disability. A document that takes effect while you are alive, such as a trust or other agreement, is necessary to ensure your pet is cared for when you cannot do it yourself.
As a result of the increase in the federal gift tax exemption in 2018, now is an ideal time to utilize gift tax planning where an older generation wishes to transfer ownership of a closely held family business to a younger generation. The federal gift, estate and generation-skipping transfer tax exemptions are currently $11,400,000 and indexed for inflation. In 2026, however, the federal gift, estate and generation-skipping transfer tax exemptions are scheduled to reduce to $5,000,000 as indexed for inflation.
Overall considerations in transferring a closely held family business
There are many options to consider in transferring a closely held family business and each family must determine what methods are best for their situation. These methods include grants of stock ownership as compensation, sale of stock, either outright or in trust, to a younger generation and gifts of stock, either outright or in trust, to a younger generation. In many cases the gift tax value of the business interest is discounted for minority interest and lack of control.
Why do many families prefer gifts to trusts?
There are also significant non-tax advantages of a sale or gift of stock using a trust. First, the older generation can control the ultimate ownership of the stock for the younger generation. Second, a trust can provide asset protection for the younger generation from creditors, including divorcing spouses. Third, a trust can establish very specific terms under which the income or eventual sales proceeds are held for the benefit of a child and future grandchildren.
There are significant tax advantages, including leveraging gift and generation-skipping transfer tax exemptions, as well as income tax benefits of using a trust. The grantor (donor) of the trust can allocate generation-skipping transfer tax exemption to the trust so that the trust will not be taxed in a child’s estate and can pass free of estate tax to grandchildren or remote descendants. This will provide the ability for the family business to continue through the generations, assuming that is the goal of the family. Income tax advantages include the ability for the grantor to minimize use of the gift tax exemption, defer or eliminate gain on a sale of the business and continue to pay income taxes on the transferred business interests using the GRAT or IDGT techniques described below.
Structuring a gift of business interests using a Grantor Retained Annuity Trust (GRAT)
A GRAT is a gift tax technique that is ideal for business owners who have already used or do not wish to use their gift tax exemption. Using a GRAT, a donor can transfer future appreciation of gifted business interests for a very small gift tax cost.
Sale to an Intentionally Defective Grantor Trust (IDGT)
An alternative to an outright sale or gift is a sale of business interests to an irrevocable trust established by the grantor (donor) for the younger generation. It is possible to draft this trust as an intentionally defective trust, so that for income tax purposes the trust will be treated as a grantor trust as to the grantor. This means that the sale to the trust will not trigger capital gains to the grantor. Further, the grantor will continue to report all of the income generated by the business interests even though that income is received by the trust. This is a way to leverage the original gift as the grantor’s payment of income taxes is not treated as an additional gift to the trust.
Other significant advantages are the flexibility afforded by drafting the trust to include a provision allowing the trust to reimburse the grantor for income taxes if the grantor does not have sufficient funds to pay the income taxes. Further, in the unlikely event that the succession plan for the family business changes, the grantor has the ability to substitute assets of the trust, which means that the grantor can transfer cash to the trust equal in value to the business interest and take back the business interest.
It is common for a married individual to fully provide for a spouse under his or her estate plan and to execute what is called an “I love you” will.” However, it sometimes happens that the married individual does not bequeath property for his/her spouse, often because he or she has children from a previous marriage and wants to leave family property to them. State laws generally do not favor disinheriting a spouse and may allow the surviving spouse to claim a portion of the decedent spouse’s property despite the provisions of the will. Absent a pre- or post-nuptial agreement addressing parties’ interests in each other’s property at death, “Elective Share” statutes can prevent a spouse from being disinherited under the decedent’s estate plan. A recent Massachusetts Supreme Judicial Court opinion underscores the importance of elective share statutes when individuals do not provide for a surviving spouse.
What are Elective Share statutes?
Elective share statutes generally allow a surviving spouse who has been disinherited by the deceased spouse to claim a fixed portion of the decedent’s estate (elective share), and in so doing, circumvent the decedent’s wishes. The purpose of elective share statutes is to allow a measure of financial protection to the surviving spouse, saving him or her from destitution.
Each state sets its own rules, and many states provide that the size of the elective share depends upon whether the decedent left issue (i.e., children, grandchildren) or parents. For example, New York allows a surviving spouse to claim the greater of $50,000 or 1/3 of the estate while Illinois allows a surviving spouse to claim 1/2 of the estate if the deceased did not leave issue but only 1/3 if the deceased left issue. In comparison, Massachusetts sets out a complicated matrix that depends on the degree of kinship of the other surviving relatives and the type of property left by the decedent. Some elective share statutes, such as Illinois’s, limit a surviving spouse’s claim to probate property; others, such as that of Massachusetts, include certain non-probate property, such as a decedent’s revocable trust.
Massachusetts’ Elective Share Statute
Where a decedent leaves issue, the Massachusetts elective share statute allows the surviving spouse to claim an interest in 1/3 of the deceased’s personal and real property. To the extent that the value of the 1/3 exceeds $25,000, the electing spouse will receive $25,000 outright and an interest in the remainder of the 1/3 share.
In a case decided in January 2019, Cianci v. MacGrath, SJC-12531 (Mass. Jan. 8, 2019), Massachusetts’ highest court determined the exact nature of the surviving spouse’s interest in that remainder of the 1/3 share. In this case, the decedent’s family consisted of a wife and adult children from an earlier marriage and his property consisted of three parcels of real estate. The case does not mention whether the couple had established a pre- or post-nuptial agreement, which could have determined the parties’ interests in each other’s property at death. The husband’s will made no provision for his wife and his real estate was bequeathed to his children. Not surprisingly, the wife elected against the will and then sought to force the sale of the real estate. Not surprisingly, litigation followed. The ultimate ruling was a toss-up: the Massachusetts Supreme Judicial Court determined that the wife has a life estate in the real estate subject to the 1/3 share, that she can seek division (partition) of the property to settle her share and that she is entitled to compensation for the value of her interest in any property that had already been sold.
What if you do not wish to fully provide for your spouse under your estate plan?
You should not assume that you can disinherit your spouse. If your estate plan does not provide at least as much for your spouse as your state’s elective share statute provides, your spouse could have a state-sanctioned override. You should consult with your estate planning attorney to determine your options and your spouse’s rights.
Premarital agreements—customarily associated with celebrities and the super wealthy—are not only for the rich and famous but also can provide numerous benefits to anyone with personal assets, liabilities, property or children from a previous relationship. Premarital agreements, also known as prenuptial agreements, are legally binding contracts that predetermine how assets and financial responsibilities will be divided among spouses in the event of a divorce and upon death.
As family structures in modern society continue to become more complex and diverse, premarital agreements become an increasingly important planning technique that should be considered by spouses prior to marriage.
In considering whether or not to enter a premarital agreement, spouses should weigh the advantages and disadvantages associated with such agreements.
Advantages of premarital agreements.
• Clarification of financial responsibilities. Premarital agreements provide clarification of the financial rights and responsibilities of each party during and after a marriage. Specifically, couples can determine what qualifies as marital property and what qualifies as separate property. By dealing with these matters in advance of the marriage, unreasonable expectations can be better managed and/or eliminated, subsequently reducing the likelihood of future financial conflict. Additionally, family heirlooms or separate property can be maintained and distributed accordingly in the event of divorce.
• Creditor and debt protection. Marriage not only results in blending family, but also finances, assets and, more-often-then-not, each spouse’s debts and liabilities. Premarital agreements can provide financial protection from the unwanted debts of the other spouse, which can include student loan debt, taxes and credit card debt.
• Control of spousal support. Family law is highly unpredictable in determining spousal support and maintenance in the event of a divorce; however, premarital agreements provide spouses the opportunity to eliminate this uncertainty. Through the use of premarital agreements, spouses have the opportunity to agree upon an amount of spousal maintenance or eliminate it all together.
• Decreased litigation expenses. Divorce can be expensive and lengthy. Premarital agreements allow spouses the ability to address the most common legal hurdles in divorce, which can bring a quicker resolution to the process and avoid a potentially lengthy court battle.
Disadvantages of premarital agreements.
• Inability to address child support. Although premarital agreements enable spouses to come to an agreement regarding spousal maintenance, premarital agreements cannot be used to set future parenting time and legal decision-making or child support. Child-related matters are determined by the best interests of the child by a court of competent jurisdiction.
• Difficult topics to discuss. Although marriage is a partnership that goes beyond romance and includes serious issues such as property and finances, for some couples, discussing these matters might put a blemish on this exciting time. Often discussing the topics of marital property, financial obligations and pre-marital debts can be difficult, stressful and cause conflict between couples.