King & Wood, P.A.

Everyone Needs an Estate Plan

“Life is unpredictable. At least some uncertainties and concerns can be addressed with a good estate plan that offers a wide range of benefits intended to protect one’s well-being and family’s wealth.”

A comprehensive estate plan offers many benefits, from protecting surviving spouses, ensuring one’s wishes for medical care are followed, or reducing estate taxes. While the primary focus of an estate plan is different for every individual, reports the article “A good estate plan important” from The Record-Courier, there are common benefits for everyone concerned.

A good estate plan protects individuals and families before death by protecting assets for the use of an incapacitated person by placing them in a trust managed by a responsible trustee. An estate plan allows you to designate an agent to make health and financial decisions during incapacity. It will enable you to develop a retirement strategy by assessing and organizing your assets and financial needs.

With an estate plan in place, a deceased person’s family is spared the burden of making difficult decisions, including when or if to withhold life support treatment or how to handle a loved one’s remains. These decisions can be made in advance through the estate plan, so the family knows their loved one’s wishes, making a difficult time a little less stressful.

Clearly and transparently expressing goals and wishes for the final distribution of one’s estate removes the emotions and potential conflict associated all too often with the division of money and other assets, including personal effects.

An organized and funded estate plan ensures that the family is protected. If the right steps are taken, there will be enough money to pay bills and other living expenses, financial affairs will be organized, and accounts will be accessible to loved ones immediately without waiting for probate and the court’s permission. Guardians for minor children are appointed, and uncertainty needs not make their grief and trauma worse. Special needs children and adults are protected with a trust to supplement their needs in addition to government benefits, and the education of young adults is planned for with a college fund.

A comprehensive estate plan prepared in tandem with a business succession plan is crucial for business owners. Without a succession plan and estate plan, the business can fall apart after the departure or demise of the business owners. An estate plan can provide the rules and instructions for the business to transition to a new owner and ensure continuity.

A good estate plan also addresses tax planning. There are more than a few tax reduction strategies to minimize the taxes on a decedent’s estate, making more money available to the surviving family.

For philanthropically minded people, the estate planning process can also support charitable causes, creating a legacy and inspiring other family members to think beyond their own needs and wants to serve their communities.

It’s never too early to begin preparing an estate plan—life is unpredictable, and there’s no downside to being ready for whatever may come next.

Reference: The Record-Courier (Aug. 27, 2023) “A good estate plan important”

Benefit Controlled Trust May Be Answer to Protecting Legacy

“Life is messy sometimes. Divorce, bankruptcies and lawsuits happen. They can potentially wipe out the inheritance you’ve carefully set aside for your loved ones. However, there are many trust options to help keep life from ruining your legacy.”

When beneficiaries receive their inheritance in their own names, a legacy becomes vulnerable to creditors, lawsuits, divorce and a second estate tax when they die. Complicating matters further, if the heir receives means-tested government benefits, their benefits may be lost if they receive a direct inheritance.

There is a solution, explains the article “What a Beneficiary Controlled Trust Can Do to Protect Your Legacy After You Are Gone” from Kiplinger. Having each beneficiary’s inheritance go into their own Beneficiary Controlled Trust can protect your legacy. Properly created and funded, the beneficiary may control, use and enjoy their inheritance with less risk than outright ownership. A Beneficiary Controlled Trust protects loved ones from the ups and downs of life. Divorce, lawsuits, creditor claims, bankruptcy are all unpleasant, but they do happen.

A Spendthrift Trust is used for beneficiaries who cannot be trusted to make good financial decisions, or who have people in their lives who can’t be trusted. It’s like a spigot on a garden hose. The trustee decides when the beneficiary should receive access to assets, how much and when.

In a Beneficiary Controlled Trust, the beneficiary can also be the controlling trustee. The beneficiary has the same level of control as they would with outright ownership. They can make investment decisions. Assets, including real property or investment accounts, are owned by the trust.

After inheritance, the primary beneficiary has the ability to alter the level of control or protection, if they are concerned about upcoming risks. If the risk is particularly strong, for example, a contentious divorce, the primary beneficiary may resign as a trustee and appoint a trusted family member or professional to act as a trustee.

Another trust is a HEMS trust, one limited to providing distributions for the beneficiary’s Health, Education, Maintenance and Support. HEMS trusts are used to avoid estate tax. However, in some states, certain creditors, including divorcing spouses or health care providers, are permitted to pierce the trust and access assets.

If the primary beneficiary of a Beneficiary Controlled Trust wishes to enhance asset protection, they can appoint an independent trustee who serves as the distribution trustee. They may make distributions to the beneficiary at their discretion, which can provide another level of protection. The beneficiary may not wish to giver such broad discretion to an Independent Trustee, as in the case of Brittney Spears. This can be minimized by giving the primary beneficiary the right to remove and replace the Independent Trustee. The beneficiary won’t have direct control over the distributions, but they decide who will manage the trust. The person may not be a related party or subordinate person.

Taxes should always be a consideration when creating trusts. Your estate planning attorney should review goals, concerns, and your unique situation to determine which type of trust works best for you and your family.

Reference: Kiplinger (Sep. 13, 2021) “What a Beneficiary Controlled Trust Can Do to Protect Your Legacy After You Are Gone”

Mega-IRAs Could Be a Source for New Public Policies

“Congressional Democrats are weighing a new type of required distribution from individual retirement accounts, based on the account value instead of age, according to a discussion list of policy ideas obtained by CNBC.”

There are few specifics but owners of “mega” IRA accounts worth more than $5 million might be presented with new withdrawal requirements, if legislation for a new national safety net becomes law. For a very small slice of the American population, IRAs have become million and even billion dollar tax deferred accounts, according to a recent article from CNBC titled “Democrats may change the rules for ‘mega’ IRAs over $5 million."

There are roughly two dozen tax categories being considered by Congress to help raise money for the expansion of the nation’s safety net, which for now is anticipated to have a $3.5 trillion price tag.

The policy concept was spotted on a draft of ideas lawmakers assemble before formally pitching the ideas before their colleagues. Floating game-changing ideas to gauge response is part of today’s legislative process.

The list didn’t include a specific amount but suggests a limit of $5 million. It also included information regarding the number of mega IRA accounts. Apparently, the number of IRA accounts worth more than $5 million has tripled in the past ten years.

In contrast, the average American’s IRA is valued around $39,000.

The idea is part of a broader theme of raising revenue from the wealthy to pay for social needs, like education, address climate change, assist working families with paid leave, childcare and other basic human needs.

It may have been sparked by a recent report that one of the founders of PayPal owns a Roth IRA valued at $5 billion. IRAs were created as a means of encouraging working Americans to save for retirement. However, they have become huge tax shelters for the wealthy.

More than 28,600 taxpayers owned IRAs worth more than $5 million in 2019, but they account for less than a tenth of 1% of the 70 million Americans who have a traditional or Roth IRA. The mega accounts add up to $280 billion, or about 3% of the total $8.6 trillion owed in IRAs.

Limiting the size of tax-deferred retirement accounts isn’t new. Several attempts have been made to cap the amount in IRAs or change distribution rules.

The final legislation may not be known for some time, but one response to this proposal would be to convert traditional IRAs to a Roth. Paying taxes at the time of the conversion, even if done over time, could be useful to eliminate having to pay taxes on the funds, if withdrawal rules change. In addition, there are no Required Minimum Distributions (RMDs) on Roth IRAs, so funds can grow tax free for the life of the owner.

Reference: CNBC (Sep. 8, 2021) “Democrats may change the rules for ‘mega’ IRAs over $5 million”

How Is Insurance Used in Estate Planning?

“There may be potential benefits to life insurance beyond its traditional uses, especially when it comes to taxes, estate planning and long-term care.”

It’s possible that life insurance may play a much bigger role in your estate planning than you might have thought, says a recent article in Kiplinger titled “Other Uses for Life Insurance You May Not Know About.”

If you own a life insurance policy, you’re in good company—just over 50% of Americans own a life insurance policy and more say they are interested in buying one. When the children have grown up and it feels like your retirement nest egg is big enough, you may feel like you don’t need the policy. However, don’t do anything fast—the policy may have far more utility than you think.

Tax benefits. The tax benefits of life insurance policies are even more valuable now than when you first made your purchase. Now that the SECURE Act has eliminated the Stretch IRA, most non-spouse beneficiaries must empty tax-deferred retirement accounts within ten years of the original owner’s death. Depending on how much is in the account and the beneficiary’s tax bracket, they could face an unexpected tax burden and quick demise to the benefits of the inherited account.

Life insurance proceeds are usually income tax free, making a life insurance policy an ideal way to transfer wealth to the next generation. For business owners, life insurance can be used to pay off business debt, fund a buy-sell agreement related to a business or an estate, or fund retirement plans.

What about funding Long-Term Care? Most Americans do not have long-term care insurance, which is potentially the most dangerous threat to their or their spouse’s retirement. The median annual cost for an assisted living facility is $51,600, and the median cost of a private room in a nursing home is more than $100,000. Long-term care insurance is not inexpensive, but long-term care is definitely expensive. Traditional LTC care insurance is not popular because of its cost, but long-term care is more costly. Some insurance companies offer life insurance with long-term care benefits. They can still provide a death benefit if the owner passes without having needed long-term care, but if the owner needs LTC, a certain amount of money or time in care is allotted.

Financial needs change over time, but the need to protect yourself and your loved ones as you age does not change. Speak with an estate planning attorney about your overall plan for the future.

Reference: Kiplinger (July 21, 2021) “Other Uses for Life Insurance You May Not Know About”

Why Is It Important to have a Will?

“Less than half of Americans have a will. Here's why it's critical to be among those who have taken the time to draft this important document.”

A Gallup poll released in June showed that slightly less than half of all Americans have a will to tell loved ones what they want to happen with their estate after they die. What’s surprising is that the results of this survey have been almost the same since 1990, explains the article “6 Reasons You Need to Make a Will Now” from Real Simple. The survey also showed that upper-income Americans are more likely than lower-income Americans to have a will, and the younger people are, the less likely they are to have a will.

One of the lessons from the pandemic, is how fragile our lives are. It’s never too early to start planning and properly document your wishes. If you need more reasons to begin estate planning, here are six:

No will often leads to unwanted consequences. A major misconception is the idea that you don’t need a will because everything you own will go to your family. Not necessarily. Each state has its own laws about what happens if you have no will, and those laws are usually based on bloodlines or kinship. Most states leave two-thirds of your assets to your children and one-third to your spouse. Will your spouse be able to maintain the same standard of living, or even remain in the family home if this is how assets are distributed? A no-will situation is a no-win situation and can fracture even the best families.

Wills are used to name guardians for minor children. No parent, especially young parents, thinks that anything will happen to them, or even more unlikely, to both parents. However, it does. Creating a will offers the opportunity to name guardians to care for your children after death. If you don’t designate a guardian, a judge will. The judge will have never met your children, nor understand your family’s dynamics, and might even determine that the children should be raised by strangers.

Wills and pet trusts can protect pets after your demise. If you have beloved animal companions, it’s important to understand what can happen to them after you die. The law considers pets to be property, so you can’t leave money to your pet. However, you can create a pet trust and name a person to be the caregiver for your pet, if it survives you. The trust is enforceable, and the pet’s care can be detailed. Otherwise, there is no guarantee your pet will avoid being euthanized.

Taxes are part of death. Creating an estate plan with an experienced estate planning attorney who is knowledgeable about estate taxes, could save your heirs from losing a significant part of their inheritance. There are many tools and strategies to minimize taxes, including making charitable gifts. Plans for large estates can be structured in a way to avoid as much as 40% of tax exposure. It’s even more important to protect a smaller estate from being lost to taxes.

Peace of mind. Remember, wills and estate plans are not just for the benefit of the person who creates them. They are for the family, the surviving spouse, children, and grandchildren. If you did not take the time and make the effort to create an estate plan, they are the ones who will live with the consequences. In many cases, it could change their lives—and not for the better.

Putting it off never ends well. When you’re young and healthy, it seems like nothing can ever go wrong. However, live long enough, and you learn life has ups and downs and unexpected events—like death and serious illness—happen to everyone. Creating an estate plan won’t make you die sooner but having one can provide you and your loved ones with security, so you can focus on living.

Reference: Real Simple (June 25, 2021) “6 Reasons You Need to Make a Will Now”

What Should Be Included in Estate Planning?

“The best time to do estate planning is ten years ago, but the second-best time to do so is now.”

How should you plan for the future, given all that we’ve been through since March 2020? One important step is to get your estate plan in order. While many people became more aware of their mortality since the pandemic began, just as many have kept putting off having an estate plan done. The time to do it, according to the recent article “A Simple Guide to Estate Planning Best Practices” from Accounting Web, is now. Here’s how.

Start with a will. The size of your estate doesn’t matter. Having a will means that you are able to grant whatever you own to someone else on your death. If you don’t have a will, your state’s law will distribute your worldly goods. This method makes certain assumptions that might not be true. You might not want your children to inherit everything you own at age 25. You may also have a distant cousin who thinks they are entitled to an inheritance and is willing to litigate just to get some of your assets. Having a will is the start of having an estate plan. It’s also how you name the executor, the person who will be in charge of administering your assets after death. Your will is used to name a guardian to care for minor children.

Consider your estate planning goals. If you have an estate plan that’s older than four years, it’s time for a review. If you don’t remember when your estate was last done, you definitely should have it reviewed. Your assets may have increased or decreased. The person you named to be your executor may have moved away or died. The past five years have seen a large number of new tax laws, which may have a major impact on your estate plan. You may need to establish trusts and make gifts to keep your wealth in the family.

Could low-cost wealth transfers be right for you? Making gifts to your next of kin may allow them to have access to capital, while decreasing your taxable estate. One common method to do this is through an intra-family loan. By providing a younger member of the family with a loan at a minimal federal interest rate, the younger generation can invest in assets that are likely to appreciate outside the older generation’s taxable estate. Talk with your estate planning attorney about how to do this properly. It’s not a do-it-yourself transaction.

Grantor Retained Annuity Trusts (GRATs) A GRAT allows you to retain an annuity interest in a separate trust, while leaving the remainder beneficiaries. The value of the annuity is removed from the value of the GRAT-constrained property, so beneficiaries only need to pay taxes on the remainder of the value. Low interest rates made a GRAT very attractive, and low entry requirements provide an opportunity to appreciate assets within the GRAT, which might have otherwise been levied on the investments if they were passed through a will. GRATs may need management—one strategy is to combine assets with a series of long and short-term trusts to prepare for market volatility.

Grantor Trust Acquisition of Assets. Here’s a slightly complicated but effective way to reduce taxes on assets: selling them to a grantor trust. The sale may still be taxable, but for a reduced rate. An individual may create and fund a trust using a portion of their gift tax shelter allowance. This ensures that the assets in the trust will be sheltered from transfer tax in the future. The trust structure works as a “grantor” trust for income tax purposes with the individual as the taxpayer, who is liable to report all income generated from the trust. Here’s the neat twist: the individual may sell these appreciated assets to the grantor trust without expressing capital gains. The assets in the trust may grow over time, so the trust estate develops with less fear of tax liability. This is a complex transaction that an estate planning attorney can discuss with you.

One thing is certain: the financial demands of the pandemic have created a need for government agencies to find revenue. The time to prepare for increased taxes on wealth is now.

Reference: Accounting Web (June 23, 2021) “A Simple Guide to Estate Planning Best Practices”

Celebrity Estate Planning Mistakes

“If you do not learn from your mistakes, you are doomed to repeat them. In Estate Planning, if you do not learn from other’s mistakes, you are likely to repeat them.”

The size and scope of the mistakes made by celebrities may be enormous, but many of the mistakes are common for, well, us common people. Learning estate planning lessons from the mistakes made by celebrities and very wealthy people is a good way to prevent yourself from making those same mistakes, says the recent article “Lessons to be Learned From Failed Celebrity Estates” from Forbes.

Let’s start with James Gandolfini, famed for his role in The Sopranos and many movies and television shows. Strangely, he left only 20% of his estate to his wife. Had he left the entire estate to his wife, the family would not have gotten stuck with a huge tax bill. Instead, 55% of his total estate, including a significant art collection, had to be sold to pay estate taxes.

James Brown, the godfather of soul, left copyrights to his music to an educational foundation, tangible assets to his children and $2 million for his children’s education. That sounds like smart thinking, but his estate planning documents contained a great deal of ambiguous language. His girlfriend and her children challenged the estate. Six years and millions in estate taxes later, his estate was settled.

Michael Jackson’s estate fail is a classic error. He had a trust created but failed to fund it. The battle in the California Probate Court over control of his sizable estate could have been avoided.

Howard Hughes, famed entrepreneur, aviator and engineer wanted his $2.5 billion fortune to go towards medical research, but no valid will was found. Instead, his assets were divided among 22 cousins. Before he died, he did take the step of gifting Hughes Aircraft Co. to the Hughes Medical Institute. The company was not included in his estate, but everything else was.

Author Michael Crichton was survived by his pregnant fifth wife, and a son was born after his death. Crichton failed to update his will to include the future offspring. His daughter from a previous marriage fought to exclude his son from the estate. His will included language that specifically overrode a California statute that would have included his son in the estate. All heirs not otherwise mentioned in his will were to be excluded.

Doris Duke inherited a tobacco fortune. When she died, she left a $1.2 billion estate to her foundation, with her butler in charge of the foundation. The result was a series of lawsuits claiming that the foundation was being mismanaged, and cost millions in legal fees. Foundations of that size need a strong management team to avoid legal challenges.

Few estate failures are as graphic as that of Casey Kasem. The famed radio personality’s estate battle after his death included kidnapping and the theft of his corpse. His wife and children from a prior marriage fought over his care, his end-of-life care and the disposition of his remains.

Iconic artist Prince died without a will. The Queen of Soul, Aretha Franklin, died without a will, then handwritten wills were found in her home weeks after she died. For both families, lawsuits, court proceedings and huge estate tax bills could have been avoided.

If you don’t have an estate plan, get it started. If you haven’t looked at your estate plan in a while, have it reviewed. Make provisions for your family, take a close look at potential tax liabilities and if you have been married more than once, make sure to have a rock-solid estate plan that will withstand challenges.

Reference: Forbes (June 18, 2021) “Lessons to be Learned From Failed Celebrity Estates”

Michael Jackson Estate’s Big Win against IRS in Tax Court

“A ruling that Michael Jackson’s image and likeness at the time of his death were worth about $157 million less than the IRS estimated warns the agency not to look too far down the road, when assessing the value of a celebrity’s estate.”

Estate planning lawyers agree: the recent victory of Michael Jackson’s estate in U.S. Tax Court is a clear signal that the IRS should be more cautious when assessing the value of an estate’s assets. In the article from Bloomberg Tax, “Michael Jackson Estate’s Tax Win a Warning to Aggressive IRS,” one attorney says it is reasonable to think that the court reacted negatively to the IRS’ being overly aggressive.

It’s also possible that the IRS’ memory of the pop star’s pre-death fame was based on Jackson’s post-death popularity.

The dispute, which began in 2013, attracted wide attention and exposed a big disparity in how the IRS and the Jackson estate valued the pop star’s image and likeness, which was only one part of his estate. While the estate looked at current income and revenue, the IRS took a far more opportunistic approach, eyeing the income from future shows and merchandise.

The $157 million difference came down to the IRS’s inclusion of revenue streams that the Tax Court concluded were not foreseeable at the time of the entertainer’s death. Revenues from the Cirque du Soleil show, a movie and branded merchandise were created only after Michael Jackson died.

When Jackson died in 2009, there had been severe damage to his image, including allegations of sexual abuse of children and eccentric behavior. He was cleared of charges, but the damage to his image took a toll on his popularity. His notoriety undercut the value of his name and likeness while he was alive.

The sole expert witness offered by the IRS was problematic as well. He was found to have lied multiple times and refused to answer questions directly through his testimony, which the Tax Court did not like.

The case may increase interest in changing estate tax laws, given the difficulty of valuing speculative assets based on what was reasonably foreseeable at the time of a person’s death. It may be better to take a “wait and see” approach, rather than guessing at what the person might be worth in the near and distant future.

That approach might put some estates in limbo for years, forcing executors to retain assets during that time. When beneficiaries want to receive their inheritance immediately, this could present problems for executors.

One advisor says that a rational approach would be for estates to exclude likenesses or the ability to exploit a name and image, and then have distributed assets taxed after death at ordinary income rates.

For celebrities and those with a high value estate, expect more scrutiny from the IRS. The IRS is looking for revenue, and any high-profile assets will attract attention.

Non-celebrities should take heed as well. The IRS is looking for revenue, and an estate plan with strong tax planning will protect families from onerous federal and state estate taxes.

Reference: Bloomberg Tax (May 5, 2021) “Michael Jackson Estate’s Tax Win a Warning to Aggressive IRS”

How Do I File Taxes on a CARES 401(k) Withdrawal?

“Penalties were waived on 401(k) and IRA withdrawals for coronavirus costs, but you still owe the taxes.”

Several bills were passed by Congress to ease financial challenges for Americans during the pandemic. One of the provisions of the CARES Act was to allow workers to withdraw up to $100,000 from their company sponsored 401(k) plan or IRA account in 2020. This is a big departure from the usual rules, says an article from U.S. News & World Report titled “How to Avoid Taxes on Your CARES Act Retirement Withdrawal.”

Normally, a withdrawal from either of these accounts would incur a 10% early withdrawal penalty, but the CARES Act waives the penalty for 2020. However, income tax still needs to be paid on the withdrawal. There are a few options for delaying or minimizing the resulting tax bill.

Here are three key rules you need to know:

• The penalties on early withdrawals were waived, but not the taxes.
• The taxes may be paid out over a period of three years.
• If the taxes are paid and then the taxpayer is able to put the funds back into the account, they can file an amended tax return.

It’s wise to take advantage of that three-year repayment window. If you can put the money back within that three-year time period, you might be able to avoid paying taxes on it altogether. If you are in a cash crunch, you can take the full amount of time and repay the money next year, or the year after.

For instance, if you took out $30,000, you could repay $10,000 a year for 2020, 2021, and 2022. You could also repay all $30,000 by year three. Any repayment schedule can be used, as long as all of the taxes have been paid or all of the money is returned to your retirement account by the end of the third year period.

If you pay taxes on the withdrawal and return the money to your account later, there is also the option to file an amended tax return, as long as you put the money back into the same account by 2022. The best option, if you can manage it, is to put the money back into your retirement account as soon as possible, so your retirement savings has more time to grow. Eliminating the tax bill and re-building retirement savings is the best of all possible options, if your situation permits it.

If you lost your job or had a steep income reduction, it may be best to take the tax hit in the year that your income tax levels are lower. Let’s say your annual salary is $60,000, but you were furloughed in March and didn’t receive any salary for the rest of the year. It’s likely that you are in a lower income tax bracket. If you took $15,000 from your 401(k), you might need to pay a 12% tax rate, instead of the 22% you might owe in a higher income year.

Reference: U.S. News & World Report (April 23, 2021) “How to Avoid Taxes on Your CARES Act Retirement Withdrawal”

How Does an Inherited IRA or 401(k) Work?

“So, you inherited a retirement account. Before you make any decisions on when and how to access the money, it’s worth familiarizing yourself with the rules that apply to different beneficiaries.”

The rules for inheriting retirement assets are complicated—just as complicated as the rules for having 401(k)s and IRA to begin with. Mistakes can be hard to undo, warns the article “Here’s how to handle the complicated rules for an inherited 401(k) or IRA” from CNBC.

The 2019 Secure Act changed how inherited tax deferred assets are treated after the original owner’s death. The options depend upon the relationship between the owner and the heir. The ability to stretch out distributions across the heir’s lifetime if the owner died on or after January 1, 2020 ended for most heirs. Exceptions are the spouse, certain disabled beneficiaries, or minor children of the decedent. Otherwise, those accounts must be depleted within ten years.

Non-spouses with flexibility include minor children. That’s all well and fine, but once the minor child turns 18 (in most states), the 10-year rule kicks in and the individual has 10 years to empty the account. Before that time, the minor child must take annual required minimum distributions (RMDs) based on their own life expectancy.

These required withdrawals typically begin when a retiree reaches age 72, and the amount is based on the account owner’s anticipated lifespan.

Beneficiaries who are chronically ill or disabled, or who are not more than ten years younger than the decedent, may take distributions based on their own life expectancy. They are not subject to the ten- year rule.

Beneficiaries subject to that ten-year depletion rule should create a strategy, including creating an Inherited IRA and transferring the funds to it. If the inherited account is a Roth or a traditional IRA, the process is slightly different. Distributions from a Roth IRA are generally tax-free, and traditional IRA distributions are taxed when withdrawals occur. One point about Roths—if you inherit a Roth that’s less than five years old, any earnings withdrawn will be subject to taxes, but the contributed after-tax amounts remain tax-free.

If an heir ends up with a retirement account via an estate, versus being the named beneficiary on the account, the account must be depleted within five years, if the original owner had not started taking RMDs. If RMDs were underway, the heir would need to keep those withdrawals going as if the original owner continued to live.

For spouses, there are more options. First, roll the money into your own IRA and follow the standard RMD rules. At age 72, start taking required withdrawals based on your own life expectancy. If you don’t need the income, you can leave the money in the account, where it can continue to grow. However, if you are not yet age 59½, you may be subject to a 10% early withdrawal penalty if you take money from the account. In that case, put the money into an Inherited IRA account, with yourself as the beneficiary.

IRAs and 401(k)s are complicated. Speak with your estate planning attorney to make an informed decision when creating an estate plan, so your inherited assets will work with, not against, your overall strategy.

Reference: CNBC (April 11, 2021) “Here’s how to handle the complicated rules for an inherited 401(k) or IRA”