Five Rules For Inherited IRAs

Setting up an IRA for yourself can be confusing. However things can get even more complicated when you inherit an IRA. However, as this article from Forbes.com explains, with the right knowledge a family can stretch out the tax breaks of an IRA for decades. They even outline five basic rules for heirs who have inherited an IRA. I have included a few of the rules below, but if you anticipate inheriting a retirement account then I highly recommend going over the full list at Forbes.com.

1. First, do no harm.

If you inherit a retirement account, don't do anything until you know exactly what rules apply. With your own IRA you can take the money out and redeposit it in another IRA within 60 days without penalty. Not so an inherited IRA. All movement of money must be from one IRA custodian to another--be sure to specify a "trustee-to-trustee" transfer. Moreover, unless you've inherited from a spouse, you must retitle the IRA, including the original owner's name and indicating it is inherited, e.g., "Daddy Warbucks, deceased, inherited IRA for the benefit of Little Orphan Annie, beneficiary."

If two or more people are named as beneficiaries, ask the custodian to split it into separate inherited IRAs. That avoids investment squabbles and allows a longer stretch-out for the younger heirs.

2. Beneficiary forms rule.

The beneficiary form on file with the custodian of an IRA controls both whoever inherits the IRA and its ability to be stretched out. If someone other than a spouse is named as heir, they must begin taking distributions from the account by Dec. 31 of the year after inheriting, but they can draw these out over their own expected life spans, enjoying decades of income-tax-deferred growth in a traditional IRA or tax-free growth in a Roth IRA. To give your heirs maximum flexibility, name both primary and alternate individual beneficiaries--say, your spouse as primary and kids as alternates or your kids as primary and grandkids as alternates. Your primary beneficiary then has the option of "disclaiming" or turning down the account, enabling it to pass to the younger alternate.

Continue reading at Forbes.com…

Confusion Over the Dormant Estate Tax Keeps Advisers Busy

From NYTimes.com:

The disappearance of the federal estate tax this year has created confusion and frustration among the wealthy, even among those who stand to benefit from it. And this has sent them in droves to amend documents that they may have to change again next year.

Steven H. Goodman, an accountant and financial planner in Melville, N.Y., says he has not had a meeting recently without clients asking him what they need to do this year and for 2011, when the tax is set to return at a higher rate than when it expired. Yet for all the business this has brought his firm, the SHG Financial Group, Mr. Goodman says he is not happy. “It’s a pain in the neck,” he said. “Even though I do this for a living, no one likes to do this.”

Those who work with the extremely rich say they, too, have been exceedingly busy, but for a different reason. The wealthiest are looking to take advantage of a short-term trust that allows people to pass money to heirs tax-free — what’s known as a grantor retained annuity trust — out of fear that the federal government could change the terms of these trusts. Cheryl E. Hader, a partner in the individual clients group at Kramer Levin Naftalis & Frankel, said she set up 30 of these trusts last month, up from six in a normal month. Daniel L. Kesten, a partner in the private client group at Davis & Gilbert, a law firm in New York, said he was working nights and weekends last month setting up the same type of trusts.

How this boon to tax advisers happened is yet another chapter in the partisan gridlock common to Washington these days. At the end of 2009, Max Baucus, the Montana Democrat who is chairman of the Senate Finance Committee, tried to extend for three months the existing estate tax laws, put in place in 2001. But when that motion failed, the estate tax expired for the first time since 1916.

What this has meant is that the heirs of wealthy people who die this year will owe no taxes. An extreme case, as detailed in an article in The New York Times on Tuesday, is that of Dan L. Duncan, who died two months ago with an estimated wealth of $9 billion. His heirs will inherit his estate without paying the 45 percent tax that was in effect in 2009, billions that would have gone to the Treasury.

The New Estate-Tax Math: Give to Charity or Your Children?

With the estate tax on a hiatus in 2010, many experts are warning that the missing tax could result in thousands of U.S. charities seeing fewer donations this year. In previous years, it was considered a smart tax move for wealthy taxpayers to leave a portion of their estate to various charities, in addition to their heirs. However, since the IRS will not assess any tax on estate in 2010, it is likely that more Americans will leave all of their wealth to heirs.

According to this article on Wall Street Journal, before the repeal of the estate tax, leaving money to charities was not really a choice for wealthy Americans, but a generally smart financial move.

With the government taking a large chunk for the estate tax, the choice was to leave a portion to heirs after the IRS took its chunk, or leave the full pretax amount to charity. In other words, for each $1 of the estate, the wealthy could leave $1 to charity, or they could leave 55 cents for their heirs and 45 cents to the IRS (with various caveats for spouses, thresholds etc).

As of Jan. 1, however, there is no estate tax, at least for a year. So the wealthy now have a more equal choice: $1 for heirs, or $1 for charity. Guess which one they probably lean toward?

“I’d like to think we’re all altruistic,” Sanford J. Schlesinger of Schlesinger Gannon & Lazatera LLP, told Financial Planning. “But especially in a dreadful economy, repeal will have a devastating effect on charity.”

Adds Ben Harris of the Brookings Institution and Urban Brookings Tax Policy Center: “With repeal, the price of charitable giving is more expensive. This is a monumental change in the estate-tax rate. We’re not talking about going from a 45% estate tax to a 35% tax. We are talking about from 45% down to zero. Does this mean people won’t give to charity anymore? No. Of course they’ll give to charity; just less.”