Inherited retirement account

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Schooly D
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Inherited retirement account

Post by Schooly D »

My father recently passed away, bequeathing his retirement account and all other assets to his spouse, my mother. She now has to decide whether to have my father's remaining retirement account assets rolled into her own account, into a new inherited IRA, or to disclaim the inheritance and pass it on to her children and/or grandchildren. What are the important factors to consider in deciding which option to pursue?

Some context: My mother is 80 years old, in good health, and does not depend on the income (i.e., required minimum distributions) from my father's retirement account to meet her regular expenses. That is, if she were to disclaim the inheritance, it would not create any financial hardship for her, assuming her current expenditures and other sources of income remain the same. The main goal of disclaiming the inheritance would be to reduce the RMD amount, so that as much as possible of the savings can continue to grow tax-free.

Any and all advice much appreciated.

David
Cheers, | | David
Dottie57
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Re: Inherited retirement account

Post by Dottie57 »

Schooly D wrote: Sat Jul 14, 2018 7:20 am My father recently passed away, bequeathing his retirement account and all other assets to his spouse, my mother. She now has to decide whether to have my father's remaining retirement account assets rolled into her own account, into a new inherited IRA, or to disclaim the inheritance and pass it on to her children and/or grandchildren. What are the important factors to consider in deciding which option to pursue?

Some context: My mother is 80 years old, in good health, and does not depend on the income (i.e., required minimum distributions) from my father's retirement account to meet her regular expenses. That is, if she were to disclaim the inheritance, it would not create any financial hardship for her, assuming her current expenditures and other sources of income remain the same. The main goal of disclaiming the inheritance would be to reduce the RMD amount, so that as much as possible of the savings can continue to grow tax-free.

Any and all advice much appreciated.

David
If I were her I would keep it, move it to an Ira where conversions to a Roth IRA could be done. Pay the taxes out of the conversion money. ( I am assuming this could be done if rolled into an Ira in her name.) Leave it alone anduse for emergencies. A Roth would be more valuable to kids.

Update: this following link indicates if moved into her IRA, theaccount could be converted to Roth.

https://www.irahelp.com/slottreport/con ... s-roth-ira
Spirit Rider
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Re: Inherited retirement account

Post by Spirit Rider »

The only thing she should NOT do is take it as an inherited IRA. If she does this, any beneficiaries would have to take RMDs based on her age, it provides no benefit and has not assets protection.

At a minimum she should take ownership of all retirement accounts and promptly name beneficiaries. This will allow those beneficiaries to use there own age for RMDs. However, at the age of 80, the RMD will be almost 10% and increasing each year. Rapidly depleting the accounts and resulting in significant taxation.

If she has no need for the retirement assets AND there are named contingent beneficiaries. She should most definitely disclaim, the sooner the better.

However, if there are no contingent beneficiaries, she should absolutely NOT disclaim. The retirement accounts will almost certainly be left to the estate. This will result in any estate beneficiaries being required to distribute the assets within five (5) years.
not4me
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Re: Inherited retirement account

Post by not4me »

Schooly D wrote: Sat Jul 14, 2018 7:20 am ... or to disclaim the inheritance and pass it on to her children and/or grandchildren.
David
I wasn't sure how intentional you meant this statement. Are you suggesting she would disclaim just the IRA portion or the estate in entirety? Or is that essentially the same thing in this case? As already pointed out, she can pick the path but not the recipients along that path. That is, the people named contingents or those who would inherit if left in the estate. Those groups might include minors, spend thrifts, high income, etc & those situations might sway which path is best long term. If they are essentially the same people, it is more straight forward. Otherwise, she may create hard feelings within the family
NotWhoYouThink
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Re: Inherited retirement account

Post by NotWhoYouThink »

Some context: My mother is 80 years old, in good health, and does not depend on the income (i.e., required minimum distributions) from my father's retirement account to meet her regular expenses. That is, if she were to disclaim the inheritance, it would not create any financial hardship for her, assuming her current expenditures and other sources of income remain the same. The main goal of disclaiming the inheritance would be to reduce the RMD amount, so that as much as possible of the savings can continue to grow tax-free.
That's a pretty big assumption. Suppose she starts showing signs of dementia next year, and lives another 15 years. Will her current assets support the level of care she will need for all of those years if she disclaims the inheritance?
afan
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Re: Inherited retirement account

Post by afan »

The simplest thing would be for her to take it as her own IRA and take out the RMDs based on her age.
If she ABSOLUTELY, POSITIVELY, NO POSSIBLE WAY THIS COULD BE WRONG, will NEVER need the money then she can CONSIDER disclaiming. Once she disclaims, the money is gone. I would have been extremely uncomfortable with my mother doing that, although she ended up just saving the RMDs.

Doing Roth conversions might be a good idea, depending on her income and tax bracket. She will have to do the Roth conversions on money in excess of her RMDs.
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Quaestner
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Re: Inherited retirement account

Post by Quaestner »

Hi, you note that she won't need the money "assuming her current expenditures and other sources of income remain the same". My father-in-law was in the same situation through his 80's. His expenses actually trended down because he travelled less. But then in his late 80's/early 90's, expenses went up dramatically because he needed increasing assistance with daily living and dementia symptoms. I'm just saying, don't assume things will remain as they are. You'd think that children who inherited wealth early (from the disclaimed inheritance) would step up and equally contribute to mom's needs - but that shouldn't be counted on. Not everyone behaves the way you'd expect them to when getting sudden wealth.
Alan S.
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Re: Inherited retirement account

Post by Alan S. »

When considering a disclaimer for which the deadline is 9 months after the DOD, the first thing to check is the IRA beneficiary clause. Were contingent beneficiaries named? If not, what is the default provision if there are no living beneficiaries? Some agreements would specify the children, but most would default to the decedent's (father's) estate.

If it is the estate, did father have a will, and who are the beneficiaries and contingent beneficiaries in the will? A disclaimant cannot inherit as a result of the disclaimer unless they are a surviving spouse or the disclaimer is not qualified. Sometimes this results in the need for a disclaimer to be filed by an estate beneficiary in addition to the IRA beneficiary in order for the disclaimer to even be effective.

Partial disclaimers are also permitted subject to the same issues.

As other have noted, if mother later incurs major LTC expenses and runs short, are the beneficiaries as the result of the disclaimer committed into gifting funds back for her support?

With respect to electing ownership of the inherited IRA, that would result in a large RMD reduction compared to the RMD for an inherited IRA, and it would also allow her beneficiaries to use their own ages for RMDs at her passing. If her retained the inherited IRA, then upon her passing the children would be considered to be successor beneficiaries, and would have to continue mother's RMD schedule.

If ownership is elected and after owned IRA RMD has been completed, Roth conversions could be done, but taxes would be due at the higher single rate unless a conversion was done this year, her last year to file jointly. So some real planning challenges exist here.
delamer
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Re: Inherited retirement account

Post by delamer »

Quaestner wrote: Sat Jul 14, 2018 12:15 pm Hi, you note that she won't need the money "assuming her current expenditures and other sources of income remain the same". My father-in-law was in the same situation through his 80's. His expenses actually trended down because he travelled less. But then in his late 80's/early 90's, expenses went up dramatically because he needed increasing assistance with daily living and dementia symptoms. I'm just saying, don't assume things will remain as they are. You'd think that children who inherited wealth early (from the disclaimed inheritance) would step up and equally contribute to mom's needs - but that shouldn't be counted on. Not everyone behaves the way you'd expect them to when getting sudden wealth.
Agreed. Not to mention that the money could be gone and the beneficiaries unable to contribute to help mother, even if willing.

The first priority is providing for mother. If she has resources (including a home that could be sold) to pay for multiple years of long-term care without the IRAs, then she could consider disclaiming. But not otherwise.
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bsteiner
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Re: Inherited retirement account

Post by bsteiner »

Would a Roth conversion be beneficial? It's likely to add substantial value if she has other assets with which to pay the tax on the conversion. She can only do that if she rolls it over into her own IRA. She can convert either all at once or over a number of years, though she has to convert, if at all, during her lifetime. On the other hand, converting all at once would bunch the income, and give up the opportunity to use medical expenses against the income from Roth conversions.

There's no portability for the GST exemption. Would her estate, with the IRA< be more than her GST exemption? If so, disclaiming the IRA would take advantage of his GST exemption (assuming the children also disclaim, and the grandchildren are the next in line beneficiaries of the IRA).

Might she need the money? If so, she shouldn't disclaim.

It would be helpful to know the value of the IRA, the value of his other assets and how they will go, and the value of her assets.

What does the lawyer handling his estate recommend? He/she would know the details, and should be able to make some recommendations.
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Schooly D
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Re: Inherited retirement account

Post by Schooly D »

Thanks to all who have commented thus far. The information is very helpful. I'll re-read the comments several times over the next few days to ensure I understand all the considerations. My father just passed away a week ago so my thinking is a bit muddled. Initially I thought my mother had only 30 days to make a decision about my father's IRA, but I've learned that she actually has nine months, which gives us time to explore the options carefully.

Here is some more detail, in response to some of the questions commenters have raised:

My father's IRA has about $600,000 remaining in his account. My mother lives in a house that she owns free and clear and her annual income from pension, social security and her own retirement savings (excluding my farther's IRA distributions) is around $100,000, which is more than adequate to her current needs. If she were to sell her house, which she probably will do in the next few years, it would fetch at least $500,000. If she were to disclaim her inheritance of my father's IRA, we are considering transferring ownership of the asset to a trust with her three grandchildren—ages 10, 7, and 6—as the benficiaries and I and my brother as the trustees.

David
Cheers, | | David
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FIREchief
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Re: Inherited retirement account

Post by FIREchief »

Schooly D wrote: Sun Jul 15, 2018 12:25 pm If she were to disclaim her inheritance of my father's IRA, we are considering transferring ownership of the asset to a trust with her three grandchildren—ages 10, 7, and 6—as the benficiaries and I and my brother as the trustees.

David
Thanks for the additional info David. Sorry about your loss. It looks like the path forward is fairly obvious.

a) Have your mother inherit your father's IRA and treat is as her own (combining it with her own IRA)
b) Have your mother establish a qualified retirement plan accumulation trust for the benefit of either you and your brother or the three grandchildren (in this case the age of the oldest would likely determine the RMD schedule; in order to qualify the trust would likely need to have the grandchildren's children - if younger than the grandchildren - if any, designated as successor beneficiaries with the surviving grandchilren being designated as the successor beneficiaries otherwise). This trust would be named primary beneficiary of your mother's IRAs.
c) Possibly establish an additional trust (for the benefit of you/brother, grandchildren, charity, etc.) to inherit any residual non-qualified funds generated as the result of a long payout of excessive RMDs. This could be established as a living trust now to simplify management of your mother's affairs should she become incapacitated. A POA would also be necessary to manage her now sizable IRA(s) and initiate necessary RMDs to the living trust.

The time to do this would be now, while your mother is not mentally incapacitated and is capable of establishing such a plan. The qualified trust could either be established now (irrevocable but unfunded) or via her will. If (properly) executed as described above, then stretch payouts of the IRA funds would be enabled for the ultimate beneficiaries and the funds would also be protected from divorce and lawsuits. Also, to the extent your mother could fund Roth conversions of her now larger IRA(s), it would benefit the ultimate beneficiaries by allowing larger accumulations within the qualified trust without incurring inflated trust tax rates. Note that RMDs can not be used to fund Roth conversions, but withdrawals beyond the RMDs can be Roth converted. This would also be a good way for her to reduce longer term RMDs. This type of arrangement is fairly straightforward for a truly competent estate attorney but, unfortunately, you might have to look a bit to find one.

(Note: this is only an option for your consideration, please see my signature)
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
JGoneRiding
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Re: Inherited retirement account

Post by JGoneRiding »

Schooly D wrote: Sun Jul 15, 2018 12:25 pm Thanks to all who have commented thus far. The information is very helpful. I'll re-read the comments several times over the next few days to ensure I understand all the considerations. My father just passed away a week ago so my thinking is a bit muddled. Initially I thought my mother had only 30 days to make a decision about my father's IRA, but I've learned that she actually has nine months, which gives us time to explore the options carefully.

Here is some more detail, in response to some of the questions commenters have raised:

My father's IRA has about $600,000 remaining in his account. My mother lives in a house that she owns free and clear and her annual income from pension, social security and her own retirement savings (excluding my farther's IRA distributions) is around $100,000, which is more than adequate to her current needs. If she were to sell her house, which she probably will do in the next few years, it would fetch at least $500,000. If she were to disclaim her inheritance of my father's IRA, we are considering transferring ownership of the asset to a trust with her three grandchildren—ages 10, 7, and 6—as the benficiaries and I and my brother as the trustees.

David
I am so sorry for your loss. Take some time and try not to be to worried about all the details during this emotional time.

To reiterate what a few of said, your mom doesn't get to determine the beneficiaries. She can t say i don't want this ira I want it to go to my grand children, it isn't hers. She can disclaim it then one if 2 things happens, if the ira has secondary and tertiary beneficiaries then maybe it ends up with the grandkids. You need to know that before she does anything. What if only 2 of the grandkids are named as tertiary beneficiaries? Are you going to risk leaving one out? Do you know that the children would still have to take rmds? Just a really low rate. I have no idea if kiddy tax would come into play but it might someone here should know. Also you would most likely have to split it into thirds immediately it's an IRA and the I stands for individual you can t hold it in trust for multiples.

I know it's a lot to think about but you Are going to need to look at lots of angles cause there is no do over . The first step for sure is figuring out how your dad set up the next 2 layers of beneficiaries if he did at all
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