Dear Len & Rosie,
My father recently died, survived by me and my brother. My dad has about $190,000 in IRA accounts. My brother and I are equal beneficiaries. What is the tax liability? Is probate required, and can any money be gifted by us to our children to avoid taxes? Or, must all the money be re-invested? I am in quite a bit of debt and my half could certainly get me out of debt.
Welcome to IRAs 201, Inherited IRAs. Your father did exactly the right thing with his IRAs by naming you and your brother as his designated beneficiaries. His IRAs will avoid probate, and you and your brother will have the opportunity to stretch out IRA distributions to spread out your tax liability. You need to contact each IRA custodian and provide them with a copy of your father’s death certificate. They will send you and your brother beneficiary claim forms.
You can cash in your share of your father’s IRAs one of three ways. Option one is to cash in the IRA over a five year period. Option two is to cash in the IRA as if you were standing in your father’s shoes. If he was under age 70.5, you can defer taking distributions until he would have turned 70.5, and your distributions would then be calculated by checking your father’s age against an IRS life expectancy table. Option three, which is best for most beneficiaries, is to roll your father’s IRAs into Inherited IRAs for you and your brother. With an Inherited IRA, your annual distributions will be based on your age, not your father’s, so you can take out much less than he would have each year.
Every dollar in a traditional IRA is subject to income tax when it comes out. The power of an Inherited IRA is that you have a measure of control over when you pay this income tax liability. Consider the higher income tax bracket you will be subjected to if you cash in your $95,000 share of your father’s IRA all at once. The goal is to hold on to an Inherited IRA as long as you can. You will be required to take annual minimum distributions based on your age, starting Dec. 31 of the year following the year of your father’s death.
You will not be limited to taking annual minimum distributions. If you want to take out more money to pay down your debts, you may do so at any time. Just remember that you will have to pay income tax on every dollar you remove from your IRA. And since you and your brother will have separate Inherited IRA accounts, you may each make your own decisions as to what to do with your shares.
We urge you and all our readers to personally verify whom you have designated as beneficiaries on each of your retirement accounts. If you set up your IRA long ago, you may not remember whom you named as beneficiaries. You wouldn’t want your children to realize in shock that your sister got all the money because you didn’t bother keeping your IRA up to date.
Without verification, you may not have any beneficiaries at all. An IRA, 401k, or other retirement account without a designated beneficiary cannot be rolled over upon your death, either by spousal rollover or rollover to an Inherited IRA, and it will be subject to probate as well. Finally, do not name any trust as a retirement account beneficiary unless you clear it with a trusts and estates attorney first. Under some circumstances, trusts cannot rollover retirement accounts into Inherited IRAs. If your retirement accounts are valuable, don’t guess. Verify.
Len & Rosie
Dear Len & Rosie,
For years, an uncle of mine would pull me aside and tell me I was named in his will. At one time, he told me the name of his lawyer, but being young and foolish, I lost it. Is there anything public that is recorded at the time of someone’s death in regards to their will? How do I go about finding out if there was anything he wanted me to have? He always told me in secret. He told me he didn’t want his wife’s children to get it all. All I want to know is if there’s a way to find out what his wishes were, and that they were carried out. How do I go about that if I don’t even know his lawyer’s name?
You’re looking for a needle in a haystack. You should probably ask his wife in as polite a way as humanly possible. Don’t call up a widow and start asking her for money. That’s in bad taste. But there’s nothing wrong with mailing her a polite note where you ask if your uncle had a will or a trust and whether or not you’re entitled to anything, because that’s what you heard. Then apologize for even sending the letter, but say you had to ask because you really needed to know. If your uncle has children, you can ask them too.
If you’re not willing to ask the hard questions, then you should understand that it’s extremely unlikely that your uncle’s will or trust leaves you anything until after your aunt has also died. Unless he was married to his wife for only a short time, he likely put her needs above yours or any of his other relatives.
If your uncle has a will, the will probably says something like this: “I leave everything to my darling wife, and if she dies before me, I leave it all to my niece, Becky, and the rest of my family tree, except maybe for that nephew who never calls and never writes.” If your uncle’s will says that, then drop it. The wife got everything, and if you’re nice to her, she may leave you something upon her death out of the kindness of her heart.
While your uncle may have left a gift for you on his will, even if his wife is still alive, remember that his will controls the disposition of only those assets titled in his name alone, with no joint tenants or pay-on-death beneficiaries, or assets held in a trust. If he was married to his wife for a long time, it’s likely there’s nothing you’ll inherit, at least until your aunt’s passing.
You can check the superior court in the county where your uncle resided for a copy of his will. His original will should have been lodged with the court within thirty days of his death. You can also get a copy of the deed to his home to see if any of the property will be subject to probate, and you can also see whether or not your uncle and his wife created a trust. If the home is in the trust, the lawyer’s name may be found somewhere on the deed. Call the lawyer with your sensitive questions if you are not willing to ask your aunt.
Len & Rosie
Len Tillem and Rosie McNichol are elder law attorneys. Contact them at 846 Broadway, Sonoma, CA 95476, by phone at 996-4505, or on the Internet at lentillem.com. Len also answers legal questions each weekday on The Len Tillem Show, a podcast available via iTunes, Facebook, www.spreaker.com/user/lentillem and lentillem.com.