New York Estate Planning & Elder Law Blog
MONEY LEFT IN IRA AT TIME OF PASSING NOT SUBJECT TO NORMAL IRA RULES
This blog previously discussed the Supreme Court case of Clark v. Rameker and the legal implications of money remaining in an IRA at death, that is in turn left to the heirs of an estate. Putting aside the potential tax implications, if any, with passing on an account with an easily ascertainable value, passing on an IRA can strip the IRA of its legal protections, such keeping it from the reach of judgment creditors. It should be noted that this discussion does not include leaving money in an IRA to a spouse, which the law allows special treatment for, by allowing the spouse to roll it over into a regular IRA account upon the death of the owner of the IRA and treat it as if it were his/her own IRA.
With respect to all other types of heirs, with an inherited IRA, the owner can withdraw from the IRA prior to reaching the age of 59 and one half years old. If the IRA is not inherited the owner would normally face a ten percent penalty if did this. In addition, the owner of an inherited IRA must withdraw the entire balance within five years of the original owner’s passing or take annual minimum distributions, allowing the bulk of the money to sit in the account and grow tax free. The money is only taxed to the recipient upon withdrawal. Most importantly, the owner cannot add funds to the IRA account. To maintain certain protections, such as keeping the money in the IRA out of the hands of judgment creditors and to minimize the tax liability, it may be wise for the testator to leave the money in the IRA to an IRA trust or conduit trust.
CONDUIT OR IRA TRUSTS RULES
Leaving money to a conduit trust allows you to control who gets what money and when they get it; either on the triggering of a specific event or on a date certain. Requiring that the trust pay the money out over time allows you to minimize the tax liability and the assets can grow even longer, tax free. It is important to keep in mind a critical wrinkle in the law with leaving money to a non-individual, such as a trust (or even a charity perhaps). If the IRA account goes to a non-person, the money has to be disbursed within five years of the date of death of the owner of the IRA account.
If the trust meets IRS regulations, the IRS will look through the trust and treat the beneficiaries as if they were directly named as the beneficiaries of the IRA, thus negating the five year distribution requirement. This allows favorable treatment of the IRA to reattach. When there are multiple heirs to the IRA, the IRS the required minimum distribution is calculated based on the age of the oldest beneficiary. If there is no trust or the trust does not qualify as a proper IRA or conduit trust under IRS regulations and the owner of the IRA started to take the required minimum distributions the five year time line to withdrawal the entire amount is calculated differently.