IRAs are popular retirement accounts that offer tax benefits. They have become a significant part of estate and tax planning, with trillions of dollars held in them. Most households in America have some sort of retirement account. Each state has laws that affect how IRAs are administered, and IRA trustees and custodians may have their own rules that restrict options for the account owner. It’s important to be aware of these factors to avoid potential problems. The main goals of planning with IRAs are to understand the rules and to make sure your IRA is passed on to your beneficiaries smoothly. However, there are also challenges, like not being able to give your IRA away while you’re alive. The IRS released new rules in 2001 and 2002 to make things easier, but these also come with new challenges. IRA distributions are not taxed until they are given to a beneficiary, at which point they are taxed as regular income. How long the tax deferral lasts depends on whether a beneficiary is named. If no beneficiary is named, the IRA must be distributed within five years of the owner’s death, which means less chance for tax-deferred growth. Spouses get special treatment when inheriting IRAs and other qualified plan assets. They can roll over the assets or change the name on the account. This can result in tax benefits and deferral of income taxes. There are also new rules for postmortem planning, such as disclaiming, distributing, or dividing assets. These rules must be followed within specific timeframes. However, IRA planning is not just about tax rules, there are other important factors to consider, which will be discussed in this article. State laws can affect how IRAs are inherited and managed. In Florida, a surviving spouse can claim 30% of the deceased spouse’s estate, including IRAs, if they are not happy with their share. There are also laws about who can manage the inheritance for minor beneficiaries, such as children or grandchildren. It’s important to be aware of these laws when planning with IRAs. In Florida, if you have an IRA and become unable to make decisions, the court may need to appoint a guardian to manage your IRA. It’s important to have a power of attorney in place to avoid this. IRAs are protected from creditors and may not need to go through probate, unless the IRA is left to an estate. Naming a valid beneficiary for your IRA is important to keep the tax benefits. In Florida, we don’t have community property laws, but if you previously lived in a community property state, you should consider that when naming a beneficiary for your IRA. Also, keep in mind that even though Florida doesn’t have a state income tax, you may still owe taxes in other states. When it comes to divorces, IRAs and qualified plans are considered marital assets if they were acquired or increased during the marriage. If a court order states that money from an IRA should be transferred to the other spouse’s IRA, it can be done without taxes or penalties. But if the court order just says one spouse has to pay a certain amount from their IRA to the other spouse, the first spouse will have to pay taxes and the second spouse may lose tax benefits. After a divorce, it’s important to update the beneficiary of your IRA. In a case where a husband didn’t change his beneficiary and then passed away, the court ruled that the former spouse still received the money because he didn’t make the change before he died. To avoid this, make sure to include who gets the IRA in your divorce agreement or update the beneficiary designation. Laws about wills and trusts after divorce don’t automatically apply to IRAs, so it’s important to make the changes yourself. In simple terms, there are often disputes over who gets the money from an IRA when someone dies. In Florida, the beneficiary form for the IRA usually controls who gets the money, not the person’s will. For example, in one case, the court decided that even though a child was adopted, they still got the money from the IRA because the original beneficiary form listed their birth date and Social Security number. So, it’s important to make sure your beneficiary form is up to date and accurate. If someone wants to leave their IRA to a charity but doesn’t specify which one, a court can use the cy pres doctrine to divide the money among different charities that serve a similar purpose. But if someone tries to change the beneficiary of their IRA before they die and doesn’t quite finish the process, a court might still give the money to the intended beneficiary if they can prove that the person really wanted them to have it. Sometimes, when a spouse dies, the surviving spouse may not automatically get the money from their partner’s IRA account. This can lead to legal battles over who should get the money. In one case, a spouse didn’t tell the court about the IRAs they inherited from their partner, and the court ended up giving the money to the estate instead. This could have tax implications, but it’s not clear what those might be. There are different types of legal cases involving estates, such as disputes over beneficiaries and tax issues. It can be beneficial to name a trust as the beneficiary of an IRA, but it’s important to make sure the trust qualifies for tax deferral. This means the life expectancy of the oldest beneficiary of the trust can be used for distribution purposes. Separate subtrusts can also be used, but they must meet specific requirements to qualify for separate share treatment under IRA rules. Without this, the trust will be limited to using the life expectancy of the oldest beneficiary. This could be a problem if the goal was to pay the IRA assets to separate subtrusts over the underlying beneficiaryâs life expectancy. The IRS has issued different rulings on trusts and IRAs. At first, they said that each child could use their own life expectancy to withdraw money from the IRA. But then they changed their minds and said that the trust has its own life expectancy based on the oldest beneficiary. This means that the rules for how to withdraw money from the IRA have changed. When naming beneficiaries for your retirement account, be specific and plan for different scenarios. You can use disclaimers and multiple layers of contingent beneficiaries to make sure your money goes where you want it to. Also, be careful with the language in any trusts listed as beneficiaries to avoid unexpected complications. Beneficiaries of an estate are not the end of the world. Even though estates are not considered designated beneficiaries, there is good news in the rules. If the owner of an IRA dies after age 70 ½, the estate can use the remaining life expectancy of the owner to defer taxes. This means there is still time for deferral if there are issues with the beneficiary designation. Just be aware that it can be hard to find an IRA trustee willing to divide the IRA for continued deferral. An IRA agreement is like a contract with the bank that holds your retirement savings. It needs IRS approval to make sure it follows the rules. But, the bank can add their own rules too, like making you resolve problems through arbitration, or deciding what happens if you die without naming a beneficiary. Some older agreements might not give your money to the right people if you die, so it’s important to understand what the agreement says. It’s a good idea to read the fine print and understand the terms you’re agreeing to. It’s really important for the owner of an IRA account to review the rules and agreements that govern their account. These rules can change because of tax laws, so the institution might update them. It’s also important to keep copies of any forms that say who will get the money if the owner passes away. Even though everything is going digital, it’s still a good idea to keep paper copies of these forms with other important documents. In Florida, these forms are even more important than a will when it comes to who gets the money from the IRA. It’s important for professionals who work with retirement accounts and estate planning to stay informed about the laws and rules that apply to IRAs. This will help them guide their clients and avoid costly mistakes. It’s a complex and constantly changing area, so staying up to date is crucial. Kristen M. Lynch is a lawyer in Boca Raton who specializes in helping people with their estate planning, taxes, retirement and IRA matters. She has a lot of experience and has worked with wealthy clients for many years. She is very qualified and has a lot of certifications in trust and financial advising, as well as IRA services.
Source: https://www.floridabar.org/the-florida-bar-journal/the-top-five-things-practitioners-need-to-knowabout-iras-now-a-discussion-of-state-law-case-law-and-other-considerations/
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