When Your Estate Includes an IRA

Several times each year, an executor will ask us, “What do I do with the IRA in the estate?”  Often the IRA is one of the most substantial assets of the estate, but the decedent may have assumed his or her estate plan was complete once they signed the will and trust documents. Many well-intentioned settlors do not realize that IRAs are often very different than the other assets of their estate and may not be governed by their will or trust.

Here are five ways an IRA is different than other assets in a typical estate:

1. The will usually does not control the beneficiary of an IRA. The IRA account has its own designation of beneficiary form, which controls who receives the IRA at death, regardless of what the will states. A will only controls who receives the IRA if the designated beneficiary of the IRA is the estate, which is generally not recommended.
2. IRAs do not receive a step-up in basis at death. Most assets held by the deceased get a “step-up” in basis at the date of death, usually eliminating gain that would otherwise be recognized. The beneficiary of the IRA inherits the owner’s basis without any basis adjustment.
3. IRAs are taxed as ordinary income. Typically the sale of stock and receipt of dividends are treated as capital gains and taxed at a lower rate. Any distributions from an IRA are not treated as capital gains, but are taxed at ordinary income tax rates.
4. An IRA cannot be gifted. You cannot gift all or part of your IRA to your beneficiaries before death. To gift the funds, you would have to take a distribution, on which you would be taxed, and gift the proceeds to the beneficiaries. An exception exists for those over 70-and-a-half-years-old; they are allowed to gift up to $100,000 to a qualified charity each year without having to count the transfer as income.
5. IRAs may be subject to required minimum distributions (RMDs). This is an often overlooked item during estate administration. If the deceased was over 70-and-a-half-years-old, they were required to take RMDs, which is the minimum amount they must receive from the IRA by law. Many executors forget that RMDs are required even after the deceased passes away. The rules for RMDs are complex and vary depending on who the beneficiaries are and their ages, so retaining a competent advisor is especially important.

IRAs often can be a headache for those administering an estate, simply because the deceased did not understand the need to plan adequately for the transfer of the IRA account. While an IRA is not subject to probate, there are many other traps for the unwary that dwarf this small benefit.

Contact Aprio’s Retirement Plan Services team today to connect with an experienced advisor. Schedule a Consultation