How a large IRA can cause tax problems for beneficiaries

On Behalf of | May 27, 2015 | Trusts |

With no way of knowing what the future holds, there is no way of knowing how much retirement is “enough.”  

Many people without pensions or 401(k) accounts decide to put away as much as possible in individual retirement accounts (IRAs) because they know that any remaining assets will be transferred to their beneficiaries.

But what some people don’t realize is that this can create a major tax problem for beneficiaries unless effective tax planning is used.

IRAs can transfer to spouse beneficiaries without a tax penalty, but after that, those who inherit what’s left will be hit with the tax burden. That’s because IRAs are considered as part of a person’s taxable estate, which means that they are subject to federal and state estate taxes.

Additionally, traditional and Roth IRAs require beneficiaries to take annual minimum distributions, which can lead to significant income tax consequences.

The good news is that working with an estate planning firm can address these problems and more so that inheriting an IRA can be a blessing and not a burden. A trust can be a great tool for avoiding the negative tax consequences that sizeable IRAs can create for those who inherit these assets.

Using trusts and other strategies, an experienced estate planning firm can examine their client’s situation and create an IRA inheritance that limits tax consequences as much as possible and helps to preserve the asset for a longer period of time.

Additional strategies include:

  • Generation-skipping IRA solutions
  • Limiting minimum distributions
  • Advising heirs

Talk to an experienced estate planning lawyer for more information on the tax consequences that come with inheriting an IRA and how to avoid them.


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