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February 08, 2024 at 02:13 PM
What You Need to Know
- The rules governing inherited IRAs have become much more complex since the passage of the original Secure Act.
- The inheritor of an IRA may be required to empty the account, and pay taxes on the resulting income, in 10 years.
- In some situations, beneficiaries may wish to execute a qualified disclaimer and avoid inheriting the account altogether.
Inherited individual retirement accounts were once a powerful estate planning tool — passing not only wealth but the benefit of tax deferral to the beneficiaries, who could “stretch” the tax liability over their own life expectancy.
The rules governing inherited IRAs have become much more complex — and also much less favorable — since the passage of the original Secure Act. Now, when an individual inherits an IRA, the beneficiary may be required to empty the entire account over the 10-year period following the original account owner’s death.
That can actually put beneficiaries in a difficult position, as they will be liable for paying taxes on the distributions and could jump into a higher tax bracket due to the added income. In some situations, beneficiaries of inherited IRAs may wish to explore the idea of executing a qualified disclaimer and avoid inheriting the account altogether — and also avoiding the tax consequences associated with the inheritance.
Qualified Disclaimers: The Basics
Individuals who disclaim an interest in inherited property are essentially treated as though they never received the property at all. In fact, they did not. If the strategy is executed properly, an individual can disclaim interest in an inherited IRA and avoid any of the gift and income tax consequences associated with receiving the property. Of course, the beneficiary also loses any benefits associated with the inheritance.
Note that if the individual’s estate is large enough to trigger the federal estate tax, generation-skipping transfer tax issues may come into play depending on the identity of any contingent beneficiaries.
For the disclaimer to be effective, it must satisfy certain requirements so that it is treated as a “qualified disclaimer.” To qualify, the disclaimer must be in writing, and it must be irrevocable. It must also satisfy any state-law requirements that apply.
The disclaiming party must give written notice to the IRA custodian or plan administrator within nine months after the later of (1) the original account owner’s death, or (2) the date the disclaiming party turns 21. The disclaiming party must also execute the disclaimer before receiving the inherited IRA or any of the benefits associated with the property in question.
