On Inheriting an IRA


J

JoeTaxpayer

I'd like to offer an article I wrote last month, titled “Let’s Kill All
the Lawyers”
http://rothmania.net/lets-kill-all-the-lawyers/

In summary -
Grandpa passes away and leaves granddaughter a $300K IRA, she is
properly listed on IRA as beneficiary. Mom's lawyer explains that a
minor may not inherit an IRA, it must be liquidated and the funds placed
with a trustee until the child reaches the age of majority.

The excellent punchline to this story is that I was contacted by a
reader with this issue *before* she did anything, and via series of
emails, walked her through the exact process to enable her daughter to
take RMDs over her lifetime, starting with $4237 the first year. Had she
listened to the lawyer she'd have had to handle a $91K tax bill as this
money would have been taxed at the parents' rate (save for the trivial
$1900 kiddie taxation), and even with $210K left, the income each year
would easily exceed the kiddie tax.

Note - I provided her with IRS references (Pub 590 citations) and warned
her to quote the IRS should she talk to the lawyer again. While he might
be open to an anonymous blogger knowing more than he about this topic,
egos are fragile.

I share this here because this particular, IRAs and specifically their
inheritance is a subject that's important to me, and the story is one I
thought worth sharing here.
 
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D

David S Meyers CFP

I'd like to offer an article I wrote last month, titled “Let’s Kill All
the Lawyersâ€
http://rothmania.net/lets-kill-all-the-lawyers/

The excellent punchline to this story is that I was contacted by a
reader with this issue *before* she did anything, and via series of
emails, walked her through the exact process to enable her daughter to
take RMDs over her lifetime, starting with $4237 the first year. Had
she listened to the lawyer she'd have had to handle a $91K tax bill as
this money would have been taxed at the parents' rate
Great article.

RMDs are complex enough that I find people's eyes glazing over when we
discuss them.

Inherited IRAs add a couple more dimensions - on top of the fact that
RMDs are mixed into them. The rules involve everything from whether
the beneficiary was a spouse or not, if the decedent had started taking
RMDs or not, if the beneficiary receives the IRA via a trust (and
contrary to popular belief, it is possible for a trust to be structured
to allow "stretch" payments rather than the 5yr rule, but it's got to
be done *just* right, so don't mess with this if you don't know for
sure what you're doing).

It's hideous and, frankly, like so many things in our tax code, should
fix it. But I'm not holding my breath. Most people just have no idea
that this complex little mess exists at all, or that there are options
other than the one that the misinformed lawyer told your reader about.

Thanks for posting!


--
David S. Meyers, CFP®
http://www.MeyersMoney.com
disclaimer: discussions in misc.invest.financial-plan are for
educational purposes only and should not be construed as financial
advice. For personal financial advice, please consult directly with a
professional.
 
D

Don

Grandpa passes away and leaves granddaughter a $300K IRA, she is

properly listed on IRA as beneficiary. Mom's lawyer explains that a

minor may not inherit an IRA, it must be liquidated and the funds placed

with a trustee until the child reaches the age of majority.

I am wondering if the lawyer volunteered to serve as that trustee and take care of the money himself (for a substantial fee of course). And if he had served as the trustee, I wonder how he would have invested the funds. Possibly with friends or people he knows selling financial products with big loads and fees? Yes, I know, I am suspicious bugger.
 
J

JoeTaxpayer

I am wondering if the lawyer volunteered to serve as that trustee and take care of the money himself (for a substantial fee of course). And if he had served as the trustee, I wonder how he would have invested the funds. Possibly with friends or people he knows selling financial products with big loads and fees? Yes, I know, I am suspicious bugger.
I would like to know where the lines are between "human error,"
"malpractice," and "fraud". Were I to claim to be a lawyer, I'd find
myself in quite a pickle, yet this isn't the first one I've heard giving
financial advice when clearly he was out of his league.
 
D

Don

I would like to know where the lines are between "human error,"

"malpractice," and "fraud". Were I to claim to be a lawyer, I'd find

myself in quite a pickle, yet this isn't the first one I've heard giving

financial advice when clearly he was out of his league.

I have been hoping, ever since the financial meltdown, that regulations would get tougher and the lines would be shifted so that a lot more decisions in legal, financial, and banking matters would be considered as fraud and not just errors or bad judgment.
 
H

honda.lioness

I teared up as I read this. Some 70% of this country 26 years and older does not have a bachelors' degree. The ordinary person is told time and again to trust "professionals." Then this happens. Thank you, Joe, for being there for this woman and her daughter, and thank you for sharing this. It will help others to ask the right questions and seek second opinions and advice elsewhere.

Happy new year (Rosh Hashanah) to all in the Jewish community.
 
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T

Tad Borek

I'd like to offer an article I wrote last month, titled “Let’s Kill All
the Lawyers”
http://rothmania.net/lets-kill-all-the-lawyers/

In summary -
Grandpa passes away and leaves granddaughter a $300K IRA, she is
properly listed on IRA as beneficiary. Mom's lawyer explains that a
minor may not inherit an IRA, it must be liquidated and the funds placed
with a trustee until the child reaches the age of majority.

Joe, I just read your entire post (link above) and I really think you
need to have Mom speak with the attorney again. You may be right, but
you may be completely wrong.

You said "trustee" above but the questioner you responded to said
"guardian" - which is something completely different. You do need a
guardian to administer a minor's IRA-BDA because minors can't control
the property. That can actually be a problem with some states and
custodians.

Still don't believe it? Try this - see the question on Roth IRAs,
answered by an attorney-author with a long list of estate-planning
credentials:
http://blog.nolo.com/estateplanning/tag/beneficiaries/

"Let's Kill(-file) All the bloggers"?

-Tad
 
P

Pico Rico

JoeTaxpayer said:
I would like to know where the lines are between "human error,"
"malpractice," and "fraud". Were I to claim to be a lawyer, I'd find
myself in quite a pickle, yet this isn't the first one I've heard giving
financial advice when clearly he was out of his league.
He was not giving financial advice, he was giving legal advice. And, he was
still out of his element.
 
J

JoeTaxpayer

Joe, I just read your entire post (link above) and I really think you
need to have Mom speak with the attorney again. You may be right, but
you may be completely wrong.

You said "trustee" above but the questioner you responded to said
"guardian" - which is something completely different. You do need a
guardian to administer a minor's IRA-BDA because minors can't control
the property. That can actually be a problem with some states and
custodians.

Still don't believe it? Try this - see the question on Roth IRAs,
answered by an attorney-author with a long list of estate-planning
credentials:
http://blog.nolo.com/estateplanning/tag/beneficiaries/

"Let's Kill(-file) All the bloggers"?
My daughter now has a Roth IRA. I am listed as custodian. I agree that
the child can't own such accounts outright, so the titling becomes a bit
more complex than any other account, as it will be both an inherited IRA
as well as have the parent as custodian. The article you linked suggests
the OP ask the credit union if they are ok with that. She seems less
concerned about the cash-out, perhaps since the account is probably now
that high (it was divided among 10 beneficiaries) and since it was a
Roth, with no tax due on withdrawal.
The Nolo Lawyer writes "Alternatively, cash those accounts out, open up
a custodial account at the credit union, and don’t let those kids touch
that money. When the custodial accounts end (25 in my state; varies by
state law), make them open up IRA’s with the money because that was your
father’s wish."
Huh? When the custodianship ends, there's no making anybody do anything.

I answered my reader's question from my own experience as well as from
reading Pub 590 many times over, along with the collective works of Ed
Slott.

I'd be curious to see any IRS document that suggests I was actually
mistaken. Mr Slott talks and writes, time and time again, about the
benefit of the minor as beneficiary to enable IRAs to get the most
benefit for one's family. And the Pub 590 has an RMD table going down to
age 0, suggesting that so long as one is a born person, they are able to
inherit an IRA.
 
T

Tad Borek

I answered my reader's question from my own experience as well as from
reading Pub 590 many times over, along with the collective works of Ed
Slott.

I'd be curious to see any IRS document that suggests I was actually
mistaken. Mr Slott talks and writes, time and time again, about the
benefit of the minor as beneficiary to enable IRAs to get the most
benefit for one's family. And the Pub 590 has an RMD table going down to
age 0, suggesting that so long as one is a born person, they are able to
inherit an IRA.

There's no question a minor can be an IRA beneficiary, but the typical
designation is via a trust/UTMA given the issues that come up otherwise
if the IRA owner passes away while the beneficiary is still a minor.

The question you responded to on your blog seemed to be, essentially,
"does naming a minor child individually as an IRA beneficiary held with
X custodian pose any problems under the probate code of X state?" That
isn't something you'll see addressed in Pub 590 (which incidentally is
considered non-citable anyway!). And again this whole thing may be a
non-issue, e.g. if it was just erroneous advice and the granddaughter
was named via UTMA. Suggest making sure though, and not by reference to
a lack of IRS guidance on this state's applicable laws.

-Tad
 
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D

dvsarwate

My daughter now has a Roth IRA. I am listed as custodian. I agree that
the child can't own such accounts outright, so the titling becomes a bit
more complex than any other account, as it will be both an inherited IRA
as well as have the parent as custodian.
Presumably your daughter's IRA is an inherited IRA and not based on
her earnings (babysitting? lawn-mowing? paper route?). If it was
inherited
from her grandparent, were there any issues regarding generation-
skipping
transfer tax (GST) in the grandparent's estate, or was the estate (or
bequests to grandchildren) small enough that this particular tax did
not
come into the picture?

Dilip Sarwate
 
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