Unfortunately, when it comes to inheritance and IRAs, nothing is straightforward. Even though the inheritance rules are the same regardless of account type (Roth IRA, traditional IRA, SEP IRA, etc), each inheritance case is unique. By the end of this guide, you will understand:
- The importance of having a will
- The tax implications of inheritance for spouses and other beneficiaries
- The different scenarios that can occur in inheritance planning
- The rights spouses and beneficiaries have in the process
- Extenuating circumstances that could change the outcome of an inheritance
- How inheritance works for different types of assets outside of an IRA
This guide will give you a comprehensive overview of the implications of inheritance planning for IRAs while also giving you the tools to better handle your personal inheritance situation. Read on to discover everything there is to know about inheritance and IRAs.
The two biggest factors of inheritance planning
In marriage, two people do not just enter into a love contract; they enter into a legal contract as well. The marriage agreement gives each spouse certain rights when the other spouse passes away, making this critical in the inheritance process. At times, spousal rights can supersede other property rights depending on the situation and the state or locality.
Here are some resources to help you understand the inheritance rights of spouses.
- Your Spouse’s Right to Inherit From You — No matter your inheritance plan, your spouse has certain legal rights to your inheritance. This article outlines what those rights are.
- What Does a Surviving Spouse Inherit? — The types of assets inherited by a surviving spouse and the situations where this can change are described in this article.
- How Can I Shelter Inheritance From a Marriage? — There are ways you can shelter assets so that they do not apply to marital laws when it comes to inheritance.
- The 99% Rule For Spousal Beneficiaries Of Retirement Accounts — Explains the “99% rule” that applies to inherited IRAs and some benefits spouses get over other beneficiaries.
A will is a document that clearly states who will receive your assets after your passing. When a will is present, it makes the inheritance process much more seamless.
With a will, there is no guessing what the deceased wanted after they are gone. Therefore, if you do not already have a will, you should make plans to get one as soon as possible to ensure that your inheritance desires for your IRA and other assets are carried out as you intend.
Here are some resources that will teach you more about wills, their importance, and how to write one.
- Introduction to Wills — Provides a comprehensive look at wills, why they are essential, and what they do/do not cover.
- 10 Steps to Writing a Will — A guide on how to write a will that will take care of your loved ones after you are gone. It lays out all of the steps on how to successfully complete your will and provides other resources to help you along the way.
- How to Write a Last Will and Testament — A step-by-step guide on how to write your will.
- Understanding Who Should Be Beneficiary of Your IRA — A valuable tip on how to turn a modest tax-deferred account into millions for your family. This should also be helpful to those who are deciding on who to list as heirs.
The right way to leave an inheritance
The entire purpose of estate planning is to leave your beneficiaries with as much of your wealth as possible. Obviously, you can name beneficiaries as you see fit. You can also take steps to ensure that your estate is set up in a way where those beneficiaries receive the maximum benefit after you pass on. At the same time, it is vital to have clear and open communication with your spouse, children, and other potential beneficiaries, especially if your inheritance is not being left to them all equally.
- Considerations About Passing an Inheritance to Children — How to prepare your inheritance in the most optimal way for your beneficiaries.
- How to Leave an Inheritance to Your Kids — A list of ways you can communicate to your children about their future inheritance reduces the chances of tensions or fighting.
- Ways to stretch your inheritance — Tips for making the most out of your inheritance and estate planning.
- Average Inheritance: How Much Are Retirees Leaving to Heirs? — This article explores average inheritance numbers. Different studies suggest different levels of average inheritance.
- How Much Inheritance Is Too Much? — Experts do not agree on a particular amount of how much is “too much.” In this article, statistics about the wealth of American families are used with making informed opinions.
Like non-spouses, a deceased account holder’s wife or husband can take ten years to empty their retirement account funds. But spouses retain the option to simply absorb those retirement funds into their IRAs without any added penalties. This is the primary benefit of a spousal inheritance.
Still, the rules that applied to the spouse’s IRA remain with the inherited funds. If you are not yet 59½, you cannot withdraw funds from your IRA without paying an early withdrawal penalty, even if that money came from an inherited IRA. Required minimum distributions (RMDs) work the same as if the account’s wealth came solely from annual contributions and gains inside the account.
Spouses can also take over an inherited account exactly how “stretch” IRAs worked before the SECURE Act was passed. A few other potential beneficiaries can take over an inherited account as well, including:
- Minor children of the deceased
- Disabled individuals
- Chronically ill individuals
- Individuals not more than 10-years younger than the deceased
These “eligible designated beneficiaries,” as the IRS refers to them, can transfer an inherited account into one in their name. From there, they are required to take RMDs based on their life expectancy. This means more time for the account to grow tax-free.
Like spouses, non-spouses can take ten years to withdraw the assets in an inherited retirement account fund. The most significant tax implication for non-spousal inheritance is the recently passed SECURE Act. Signed into law in December 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed to help Americans expand and preserve their retirement savings. As a result, the bill had repercussions for inheritance planning for non-spouses.
|Before the SECURE Act passed||After the SECURE Act passed|
|Within five years, beneficiaries have to withdraw the assets from an inherited IRA, taking their first RMD by the end of the year the original owner died.||Beneficiaries now have ten years to withdraw an inherited IRA.|
|A “stretch” account that lets non-spousal beneficiaries turn the inherited account into their own by taking RMDs based on their age.||Stretch accounts are virtually eliminated for non-spouses except for a small group of beneficiaries.|
Therefore, non-spouses can take up to ten years to withdraw from an inherited IRA without the fear of an early penalty withdrawal or annual withdrawal requirements. In fact, non-spouses can wait until the tenth full year after the original account owner’s passing before emptying the inherited accounts.
As previously stated, the inheritance process is not standard across the board. There are a variety of factors that determine how an inheritance will play out in any given situation. Here we will look at a few different scenarios and resources to help you understand the inheritance process.
Scenario 1: Spouse + Will
This scenario tends to be the smoothest transition of inheritance. The presence of a will outlines how the inheritance is to be passed on while spousal privileges still apply. Depending on the state, the living spouse can receive an inheritance that supersedes the will document. The spouse will also need to understand how to handle the execution of the will, which will often require legal counsel.
- What to do if you inherit your spouse’s IRA — This article gives an overview of how to calculate the required minimum distributions from an IRA you inherited from your spouse. It also offers several examples that tackle different cases of inheritance.
- Inherited IRA rules: 6 key things to know — This gives a perspective on why inheriting an IRA involves a three-way intersection of estate planning, financial planning, and tax planning. Avoid committing a mistake that leads to complicated consequences.
- Spousal Rollover IRA — What are the choices you have for Roth IRA and Traditional IRA? This article lays out three options that will guide your financial decisions.
- Inherited IRA Rules: 5 Must-Knows for Beneficiaries — Explains how your relationship to the deceased affects withdrawal rules and taxes and the difference when the account is a Roth IRA or traditional IRA.
- How to Minimize Taxes When you Inherit An IRA — Explains what you should do to minimize your tax burden when inheriting an IRA.
- Can I Roll My Spouse’s IRA Into My Own Account? — This article answers the question and gives you options to accomplish them.
- What Every Spouse Needs To Know About Inheriting IRAs — This article talks about options only surviving spouses can have on IRA inheritance.
Scenario 2: No Spouse + Will
In this scenario, all assets will be passed on to beneficiaries left in the will but were not married to the deceased. However, in this case, as well, state law can supersede the will in some instances. You can also learn about what you can do to be a beneficiary of retirement accounts that are not covered by a will.
- Non-Spouse Beneficiary Rollover — Understand the meaning of non-spouse beneficiary rollover and its implications through this article. It also differentiates IRA rollover versus transfer.
- RMD rules for inherited IRAs — Here is a rundown of everything you need to know about inheriting IRA as a non-spouse. It discusses what an RMD is and some RMD calculation methods.
- What Happens if You Inherit an IRA from someone other than your Spouse? — The SECURE Act provides different rules for non-spousal beneficiaries of IRAs. This article discusses these changes.
- Inheriting IRAs from someone other than your spouse — The options you have depending on the circumstance you are in are laid out here. It also talks about key points to remember that will make the transfer smoother.
- New Rules For Non-Spouse Beneficiaries Years 2020+ — A concise list of all the changes made for non-spouse beneficiaries starting 2020.
- Pass an IRA to Young Grandkids With Care — A detailed explanation of what you can do when your beneficiary is a minor. This can also guide you on inheritance rules you may be uncertain about when it comes to your IRA as a grandparent.
Scenario 3: Spouse + No Will
If a spouse passes away without leaving a will, there will likely be questions and confusion for those that remain. Some rights are given to spouses legally after marriage and could be the basis for inheritance even without a will. However, some accounts do require a separate list of beneficiaries regardless of marriage.
- Can a Spouse Not Named as a Beneficiary Receive Assets from an IRA? — In general terms, spouses cannot claim IRAs if they are not written as a beneficiary. However, there may be some exceptions.
- What Does The Executor Do When There’s No Will? — This article talks about who is in charge, who inherits, and who takes care of the children.
- My spouse died with no will. What does this mean? — The state laws determine what is going to happen next with the deceased’s assets. It may not be automatically handed down to the surviving spouse when the married couple has children.
Scenario 4: No Spouse + No Will
In this last scenario, there is not only no will present at the time of death, but no living spouse remains. Non-spouses who are not covered by a will may still have the right to claim their relatives’ assets depending on their relation to the deceased and the specific scenario. Learn about what happens to assets that do not have beneficiaries and state laws that rule them. The following articles cover different topics relating to this situation.
- What happens if you die with no IRA beneficiary? You probably don’t want to find out — The worst outcome may be the estate inheriting all of your retirement accounts instead of your family.
- No Living Beneficiary On An Individual Retirement Account (IRA)? What Now? — This article is written by a lawyer who offers assistance when it comes to protecting your IRAs. Failing to do specific steps may cause your heirs to be denied of their rightful inheritances.
- Why IRAs need designated beneficiaries — The absence of designated beneficiaries can result in unintended consequences that harm the rightful heirs. Hiring an advisor to overlook this on your behalf may benefit you in the long run.
- No, Your IRA Was Never Intended To Be A Vehicle To Pass Along Your Wealth — The newly implemented SECURE act may not be the most beneficial setup for heirs. There are other ways to pass along your wealth other than IRAs that are covered by strict rules nowadays.
Some inheritance scenarios involve extenuating circumstances. They can be arguments over an estate between spouses and children or cases when a will is found after an estate has been settled. A will that was written at a time when the deceased was considered mentally incapable of making their own decisions can also be a special inheritance case.
The following special cases outline historical decisions made by local and national courts that can serve as a reference if you ever run into a similar issue or think they could potentially be a problem in the future.
- U.S. Supreme Court Cites Florida Inheritance Law In Unusual Case — Ruled that children born after a parent’s death are not considered beneficiaries unless stated otherwise. Florida laws made the case more complicated.
- Negative Inheritance — The concept of “Negative Inheritance” describes a situation where the costs of taking care of the aging parents outweigh the inheritance they will leave behind for their heirs.
- The Battle for Control of Aretha Franklin’s Estate Shows No Sign of Ending — What appeared to be death without a will was suddenly shaken when homemade documents were found in Aretha Franklin’s house. Court proceedings may have pivotal outcomes since two of these documents could be considered valid under Michigan law.
- John Seward Johnson | Disinheritance & Incapacity — John Seward Johnson, heir to his father’s wealth after founding Johnson & Johnson, died at 87, leaving his estate to his third wife, Barbara Piasecka. She was 42 years younger than him. Six of his children from previous marriages asserted that he was mentally incapacitated when he changed his will years before his death.
- Inside The Pritzker Family Feud — The wealthy Pritzker clan in Chicago have assets valued at $15 billion divided into different trust funds, mostly overseas. When two young heirs suspected that other family members were looting from the trust, it resulted in a massive estate battle that was settled in 2005.
- James Brown’s Will: Is It Inching Toward Closure After 14 Years? — 14 years after the death of James Brown, the battle for his estate is still ongoing. This is due to complicated factors surrounding the heirs and doubt surrounding the validity of his last marriage.
- Leona Helmsley | The “Queen Of Mean’s” Multibillion Estate — Leona Helmsley, a billionaire who died at the age of 87, left more money for her dog Trouble than her four grandchildren. She left two children with $10 million each, the other two children with nothing, while the dog was set to inherit $12 million. These numbers dramatically changed after the judge ruled Leona to be mentally unfit when she wrote the will.
- Luke Perry Protected His Family With Estate Planning — Despite passing away at 52, Luke Perry set up a trust fund for his children in 2015 after a cancer scare. Legally, he was prepared for this moment since his children did not need court intervention, which would have happened if he passed away with only a will.
- The John Singleton Estate Teaches Why No One Should Procrastinate Updating Their Will — John Singleton died in 2019 from a stroke, leaving seven children behind, two of whom are minors and are not his verified biological daughters. His will was last written in 1998, leaving no mention of the children he had after 1998.
Inheritance and other assets
When thinking about inheritance, you likely have additional assets beyond your IRA. Things like your 401(k) plan, individual stocks, and precious metals are treated differently during the inheritance process. Here is what you should know about how these assets will be affected by inheritance.
401(k)s are similar to IRAs in their inheritance laws, but with some crucial differences. Legally, any surviving spouse automatically receives any assets from a 401(k), superseding any previous agreement between the account owner and their heirs. The spouse can sign a contract to refuse the money, in which case it would pass to the next of kin.
Here is some more information relating to 401(k) inheritance.
- What Happens to a 401(k) When You Die? — Learn about the responsibilities and tax consequences of your 401(k) to your beneficiaries after it has been passed on to them.
- What Happens to My 401(k) If I Die Before Retirement? — This article lists measures you must take to protect your family’s financial needs in case of unforeseen circumstances.
- Inheriting an IRA or 401(k) Account as a Surviving Spouse — Discusses the fact that spouses get more options than other beneficiaries even without a will and may be able to put off taxes on retirement account funds much longer.
- Do Surviving Spouses Have a Right to a 401(k) or an IRA? — Surviving spouses are treated differently under 401(k)s and IRAs. A 401(k) plan protects them, while IRAs typically do not.
Annuity holders can designate beneficiaries in their contracts. If no beneficiary is named, any surviving spouse will continue to receive benefits. If no spouse is present, the rest of the policy money could be forfeit, depending on the annuity contract’s specifics. The payout of the contract following the death of the annuity holder is stated in the annuity contract. Any remaining payments may be made in a lump sum or periodic payments to the beneficiary.
Taxes on inherited annuities depends on how the beneficiary decides to take payments from the annuity. If the beneficiary takes periodic payments over the remainder of their life, they will spread the tax liability over a more extended period. If they choose to take a lump-sum payment, it will come with a larger tax burden in the short term as a result.
- Annuity Beneficiaries: Death Benefits & Payout Options – Different types of annuity payout options and what happens to the contract in the event of policyholder death.
- How to Avoid Paying Taxes on an Inherited Annuity – The tax implications of inheriting an annuity and suggestions to reduce your tax exposure.
- Do I Pay Taxes on All of an Inherited Annuity or Just the Gain? – Understanding what taxes you are liable for under an inherited annuity.
Many people own stocks in individual brokerage accounts outside of their retirement savings. These assets are treated differently than if held inside an IRA. Stock ownership is transferred to the spouse or beneficiary, who can do with them as they wish. When the shares are eventually sold, the cost basis of inherited stock used to determine the tax calculation is the shares’ value at the original owner’s death date.
Inherited stock is not subject to income tax. However, there are some exceptions for large estates that could fall under a government-imposed estate tax. The rules for inherited stocks also apply to similar assets like ETFs, which operate under the same inheritance laws.
- What Happens to the Ownership of Stocks After a Person Dies — The provisions you make before passing away will determine who your stocks will go to after you do so. Stocks jointly owned by a married couple go directly to surviving spouses, but it differs when the stocks are owned by an individual alone.
- How to Transfer Equal Shares of Stock to Heirs — This article expounds on different steps you can take to transfer equal shares to different heirs.
- Naming a TOD Beneficiary for Stocks and Bonds — Even without a will, your designated beneficiaries may be able to claim your shares of stocks and bonds after your passing. This happens if you name a TOD (transfer on death) beneficiary beforehand.
- What Happens to Shares of Stock Passed to an Heir Who Does Nothing With Those Shares? Some heirs do not want to take ownership of inherited stocks due to some responsibilities and tax consequences. This article explains the options they have.
- How to Sell Inherited Stocks — The options you have when you want to sell your inherited stocks are laid out in this article. There is an explanation of how your capital gains will be treated for tax purposes.
The inheritance of precious metals depends on whether these assets are held within the IRA. Owning shares in gold or other precious metal ETFs is relatively straightforward and would be considered the same as owning any other type of stock or investment. Even if physical gold or other metals are held within an IRA account, their inheritance is treated like any other IRA account.
The inheritance rules differ for physical precious metals (like gold bars, coins, etc.) held outside of a retirement account. Because the IRS considers all precious metals to be collectibles, the tax rate on these inherited assets depends on how long they have been held and how much the market value has increased.
- Capital Gain Tax Rates on Collectables — The tax implications of holding collectibles and their current tax rates.
- Taxes on Physical Gold and Silver Investments — An overview of how taxes work for the sale of physical gold and silver.
- Selling inherited or gifted gold? You should know the tax rules — Understanding the tax implications when it comes time to sell inherited gold.
457(b) and 403(b)
Perhaps you are in a unique scenario with your inheritance. If you inherit retirement accounts that are not IRAs or 401(k)s, you may be wondering what to do next. Fortunately, 457(b) and 403(b) accounts are handled similarly to 401(k)s when it comes to inheritance. However, there are some caveats you should be aware of, which are described in the articles below.
- Can I Roll Over a 457 Retirement Account as a Nonspousal Beneficiary? — describes what you can do as a non-spousal beneficiary with an inherited 457(b).
- What Are My Options if I inherit an IRA or Benefit from an Employer-Sponsored Plan? — this article describes how to rollover your inherited 403(b)/457(b) into an IRA. It is very similar to the process of an inherited 401(k).
Inheritance disputes and reconciliation
Even with the best of intentions, sometimes there is no avoiding inheritance-related disputes. What was left behind in goodwill by the deceased may become a struggle that drives families apart. In these situations, the best response is to de-escalate and settle things peacefully.
Here are some guides you can read to learn more about what to do to reconcile inheritance disputes.
- Inheritance Disputes: Why They Arise and How to Resolve Them — Inheritance disputes do not only occur in wealthy families. Even when there is minimal wealth involved, families still fight over assets for possibly sentimental reasons.
- How to settle an inheritance dispute out of court — Court battles take up a lot of time and can gravely impact your finances. Here are some solutions presented by a law firm for settlements outside of courts.
- Alternative Dispute Resolution in Inheritance Disputes — This article presents the idea of Alternative Dispute Resolution (ADR) and answers the most critical questions when taking this path. It is written by an associate of a litigation team.
- Inheritance Disputes: Common Causes & Solutions — Here are some causes of inheritance disputes that commonly occur among family members. Each scenario is described, and below are solutions that may take place in and out of courts.
- Family Disputes Over Inheritance – What You Need To Know — There are concepts you have to understand to protect yourself from family disputes. This article provides a layman’s explanation for the various concepts to help you understand their implications.
- 8 Signs Your Family Will Fight Over Your Estate — Nothing beats preemptive solutions to problems. Some signs may suggest the rise of inheritance disputes when you are gone. Knowing them before you are gone can prevent them from happening altogether.
- What Are the Grounds for Contesting a Will? — Knowing what makes a will invalid is crucial for both the descendants and the beneficiaries. This article lists legal grounds for contesting a will.
- 5 Steps to Contesting a Will After Probate — Following these five detailed steps and familiarizing yourself with particular concepts will make the process more organized for you. It also helps you identify your grounds for contesting a will.
Inheritance planning takes time and energy but is a critical aspect of making sure the people you love are taken care of for years after you pass away. As for beneficiaries, understanding the inheritance process’s ins and outs is crucial to ensuring the deceased has their wishes honored and that you are not taken advantage of during the process. When it comes to inheritance, you can never be too prepared. Use these resources to help guide you along the way to anticipate and resolve any questions or disputes that could arise among your beneficiaries.