How to Pass Down an IRA

The surviving spouse can use the RMD required beginning date of the deceased spouse instead of the required beginning date of their own IRA. This can defer the start of RMDs on the inherited IRA if the deceased spouse was younger.

Also, they have the option to use the Uniform Lifetime Table to calculate RMDs, generally offering a smaller distribution amount than the Single Life Expectancy Table previously mandated for use with inherited IRAs. 

Disclaiming an IRA

One option for surviving spouses or other IRA beneficiaries is to disclaim all or part of the IRA. While this isn't something that a client might initially factor into their estate planning, as time passes it might make sense. 

One scenario might be that the surviving spouse doesn't need the money and would rather it go to other beneficiaries such as children or grandchildren. A related scenario is a concern by a surviving spouse or other beneficiary that adding these additional IRA assets would bring the size of their estate to a point where estate taxes become a factor. This is especially relevant with the sunsetting of the current higher estate tax exemption levels after 2025. 

If disclaiming all or part of an inherited IRA is a consideration for a client, be sure to walk them through the implications surrounding income taxes, inheritance taxes and issues surrounding other primary or secondary beneficiaries. 

Roth IRAs and Roth Conversions

With the Secure Act's 10-year rule for inherited IRAs, the use of Roth IRAs and Roth conversions has moved to the forefront for many as an estate planning tool. 

An inherited Roth IRA subject to the 10-year rule can be tapped tax-free by the IRA beneficiaries as long as the original account holder held the Roth IRA for at least five years before their death. 

In terms of estate planning and IRAs, there are several options and considerations. A key one is whether the account holder wants to pay the taxes and give their beneficiaries the option of inheriting an IRA that will be tax-free. Part of this may depend on the account holder's tax rate. 

An inherited Roth IRA can result in significant tax savings for beneficiaries subject to the 10-year rule. 

If the account holder wants to pass on some or all of their IRA holdings as a Roth account, there are some options to accomplish this: 

• Contribute to a Roth IRA and/or a Roth 401(k) or similar Roth retirement account. Clients will lose the current-year tax deduction but gain flexibility for their own retirement income planning as well as passing IRA assets to spousal and non-spousal beneficiaries.
• Roth conversions. This is a way to build Roth IRA assets for both clients and their beneficiaries. This can get expensive tax-wise, so this option will need to be assessed on a year-to-year basis to help avoid doing the conversion in a high-tax year.

Leaving an IRA to a Trust

Leaving an IRA to a trust has become more complicated since the passage of the Secure and Secure 2.0 acts. If this is something a client is considering, it is important to assess the benefits of naming a trust as a beneficiary with the timing of RMDs and related tax issues. 

Some potential benefits of naming a trust as an IRA beneficiary include: 

• Working through ownership issues such as a beneficiary who is a minor or a beneficiary who has special needs.
• Working through issues with a second marriage and children from a prior marriage. A properly structured trust arrangement can allow clients to use the IRA to benefit their spouse from a second marriage as well as their children from one or multiple marriages.
• Limiting the access of a beneficiary to whom the account holder does not want to grant full access. This may be a beneficiary with spending issues or other reasons to limit their ability to access the IRA funds all at once.
• Naming successor beneficiaries. Normally when a beneficiary inherits an IRA, they then name their own beneficiary for when they die. If the original account owner wanted to exert control over the successor beneficiary after the death of the primary beneficiary, a trust would allow for this. 

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