Another question regarding wills and inheritance

sushipup1

This isn't for me, since we have only one son and he gets everything. Simple.

But a friend has a different problem. She has 3 children, the oldest about 52, the one who is the executor of her estate is about 50. My friend has a regular IRA thru Schwab, and was told that only one name can be on the account as her beneficiary. But I reminded her that the heir to an IRA must follow the same rules regarding withdrawing the money as the original owner. 59=1/2 years old or pay early penalty, must follow minimum distribution rules, and pay taxes on money withdrawn. So when her daughter's brothers come looking for that handout (and they will, which is why she's the executor), the taxes will all be on her when she liquidates to pay them off.

So if she wants to split the IRA evenly for all children, looks like she can't do that without the early withdrawal penalty.

I suggested that she ask Schwab about transferring her IRA into three separate equal IRA accounts, even if she has to go to separate institutions to do so. Then each child has their own share. And I told her to talk to her attorney, too.

What's right in this scenario?

SaveComment20Like
Comments (20)
Thank you for reporting this comment. Undo
Elmer J Fudd

Dividing a decedent's estate in equal shares among multiple heirs rarely involves giving each person a pro-rata share of each asset. For estates of more than nominal value, doing so may be difficult, may be contrary to personal wishes or preferences of the heirs (one want to own a business, one prefers real estate, one only wants liquid financial assets). In such cases, what's done is to split the overall value (but not each asset) into equal shares in total value with whole or fractional ownership of different assets in different hands or even the establishment of loans between heirs to balance value.

Same is often true of asset divisions in divorce situations.

What to do? Your friend should speak with the attorney who did their estate planning.

Save    
Thank you for reporting this comment. Undo
maifleur01

I think the person that she talked to at Schwab did not know what they were talking about. Simple way to find out is for her to look at a blank beneficiary form and read it. There may be instructions to add additional pages listing other beneficiaries or even another document. If Schwab is merely the holding agent she may need to contact the actual company.

Not Schwab but I recently changed beneficiaries on both mine and my deceased husband's retirement accounts. His only had one space but instructions stated to add additional pages. Mine was more detailed in that it also had space for who the portion would go to if the main beneficiary would predecease me.

Edited to add it makes a difference if it is an IRA or a 401 type part of a pension plan as to taxable consequences.

Save    
Thank you for reporting this comment. Undo
hvhay

I don’t believe this is correct and I’m surprised that Schwab would have told her that. First of all, the IRA should be able to name multiple beneficiaries and be split among the 3 children (after your friend passes) without incurring any early penalty. (The beneficiaries could also leave it as one IRA but then they’d have to agree on how to invest it etc.) Second, after that, if they split it into 3 separate inherited IRAs, the children will need to take distributions every year beginning the year after the IRA is inherited based on their own life expectancies (of course if they want to they can take out the whole thing… they’ll have to pay taxes on it but there won’t be a penalty per se). If they leave it as one IRA they’ll have to take the distributions based on the life expectancy of the oldest beneficiary. I have inherited a couple of IRAs and was the executor for my aunt and uncle, so I learned a lot about IRAs over the past couple of years. Though my aunt & uncle left everything to their trust which was a whole ‘nother ball of wax…


Here's a website I found that explains it pretty well. https://financialducksinarow.com/5008/inherited-ira-multiple-beneficiary-example/


FYI Congress is currently considering changes to the rules for inherited IRAs such that non-spouse beneficiaries might have to take out the whole thing within 10 years of the death of the original owner which would take away some of the tax advantages you get now from inheriting in IRA in that you have your whole life to take out the distributions. I don’t know what other options she might have but it just could be worth knowing about.

Save    
Thank you for reporting this comment. Undo
jim_1 (Zone 9A)

Please consult an attorney who deals with things like this. Not one who does only real estate or litigation.

Save    
Thank you for reporting this comment. Undo
Sammy

So when her daughter's brothers come looking for that handout (and they will, which is why she's the executor), the taxes will all be on her when she liquidates to pay them off.

If her will states that her stuff is to be divided equally among the three children (the usual)—share and share alike and all that jazz—then any taxes or fees on the account would be paid equally among the three, too—like when any other asset is liquidated. When the executress (daughter in this case) is distributing the funds from this account (not sure why you called it a handout), any fees or taxes would be deducted from the gross proceeds, and then split three ways.

Save    
Thank you for reporting this comment. Undo
maifleur01

Some of us that have family members that are always looking for money or things understand the term "handout" all too well.

If it is from an account the company that holds the account should if the beneficiaries elect to withdraw the money and not just transfer will keep 20% for taxes and the recipients when filing taxes would need to pay any additional taxes and penalties for early withdrawal.

A little thing that some are not aware of is that an Executor has no control of anything that has a designated beneficiary in most states. The question of the Executor paying taxes on it does not even come into play. This is similar to accounts titled with rights of survivorship as both are considered to be outside of the estate in most states.

Save    
Thank you for reporting this comment. Undo
ritaweeda

Even when you die you owe the IRS for that year. We had to file for my FIL on his taxes the following year. I would think that any taxes due should come out of the estate and then the estate can be split up, but I could be wrong. All the heirs just need to cool their jets and wait for all the filings and debts are paid. An estate attorney and a tax professional would know what to do.

Save    
Thank you for reporting this comment. Undo
graywings123

This is a link to the Schwab beneficiary form. It appears you can leave your IRA to multiple people.

Schwab beneficiary form

Save    
Thank you for reporting this comment. Undo
Elmer J Fudd

"A little thing that some are not aware of is that an Executor has no control of anything that has a designated beneficiary in most states. The question of the Executor paying taxes on it does not even come into play. This is similar to accounts titled with rights of survivorship as both are considered to be outside of the estate in most states."

Careful maifleur, I think you're munging different things together. Even though law changes in recent years have increased the federal estate tax exemption to the point that it applies to a small percentage of decedents, the rules remain in place and are not that greatly changed. Property owned by a decedent is included in the gross value of the estate to determine taxability and if so, the amount of tax. Transfers by will or trust that sound like "I leave my lake house to my son" or "my niece should have my diamond ring" are called specific bequests and are fully included in the gross estate to the extent of the value of the decedent's ownership interest. No different than assets used for residual interests. Deductions are made for transfers to charity or to a spouse.

Executors are given great leeway typically. If there's a specific bequest but the asset needs to be sold to satisfy debts, then it's sold.

An asset where title is joint with right of survivorship isn't included in an estate for a good reason. Let's say A owns an asset, in Year 1 transfers it into an joint account with right of survivorship with Person B, and then dies in Year 5. The interest in that account was gifted to B in Year 1, not transferred at death. The title on the account may get changed but there's no transfer for gift or estate tax purposes at death.


Save    
Thank you for reporting this comment. Undo
Elmer J Fudd

"Even when you die you owe the IRS for that year. We had to file for my FIL on his taxes the following year. I would think that any taxes due should come out of the estate and then the estate can be split up, but I could be wrong. "

Of course taxes need to be paid. Remember that "the estate" is simply the assets and liabilities of the decedent and unpaid taxes are a liability. What remains (value wise) after debts are settled is available to be distributed to heirs. And not before debts are settled.

Save    
Thank you for reporting this comment. Undo
maifleur01

Elmer From your knowledge what effect does an Executor have on a beneficiary receiving money from an account set up with beneficiaries where the beneficiary is not the Estate??? Only thing that most are aware of is that the Executor may have the needed Death Certificates but a reason and payment for receiving is all that is needed to receive a Death Certificate.

Save    
Thank you for reporting this comment. Undo
Elmer J Fudd

I'm not sure I follow your question. Can you say it a different way or give an example?

Save    
Thank you for reporting this comment. Undo
maifleur01

I am posting only on accounts like the above IRA which have designated beneficiaries. My question is why you would consider an account with a beneficiary as part of an estate to be handled by an Executor.

I will use myself as an example. I was designated as my husband's beneficiary for his 456/7. With presentation of the Death Certificate the account was transferred to my name. While it was his while he was alive the minute his death was certified and the death certificate presented it was mine.

Save    
Thank you for reporting this comment. Undo
sushipup1

I'm so glad I only have one son to deal with all this stuff. ;-)

Save    
Thank you for reporting this comment. Undo
Elmer J Fudd

I'm not sure what "Handled by the executor" means.

Your question seems to be focusing on the procedural aspects of what happens with a financial institution? That has nothing to do with the paperwork for designating heirs and disposition of property at death.

I believe If someone dies with some debt and having 3 IRAs of equal value as their sole assets, which are specifically bequeathed to 3 different non-spouses designated as beneficiaries, the IRAs need to be used to satisfy the debt (probably pro-rata) before the remainder (what's left in the accounts) can be distributed to the heirs. These steps would normally be done by the executor/trustee.

Save    
Thank you for reporting this comment. Undo
maifleur01

Semantics, since naming a beneficiary is not bequeathing anything. Bequeathing is a word that is used for willing something. It was a word that used to be used in all wills. Creditors would need to bring a very quick lawsuit to prevent the distribution.

Save    
Thank you for reporting this comment. Undo
Elmer J Fudd

No, it appears your understanding is incomplete. These are rules under the law and technical terms with specific meanings. It's not a matter of semantics. You seem to be taking a personal experience, without any other background or professional training, and are assuming how things are from what you experienced/observed and consider that to be technical knowledge.

We can let it drop.

Save    
Thank you for reporting this comment. Undo
maifleur01

Oh the expert speaks again. Thank you for discounting background and training that you have no understanding of. Too bad yours is not as far reaching as you think yours was.

Save    
Thank you for reporting this comment. Undo
Elmer J Fudd

You've said you retired from the federal government, maybe in bank regulation? or maybe you also worked for banks or other financial institution at some point?

I'm a CPA and worked as a tax adviser. If my recollection about you is correct and your work was outside of the tax area then yes, compared to you and many other people, I most certainly am an expert. Even though this particular sub-field isn't where I spent the bulk of my time, I did spend time in this and had plenty of professional education on the matter.

Save    
Thank you for reporting this comment. Undo
ratherbesewing

Too many conversations going on here, but I will convey MY experience: My mother and father each had an IRA naming each other as beneficiaries. When my mother died first, my father inherited my mom's IRA--now he had 2. He changed both IRAs beneficiaries to the 3 children. We each had 33 1/3%. Upon his death, the IRA converts to a "Beneficiary IRA" which has different rules. Each of us kids could have taken a lump sum or spread it out over time. I didn't need the $$ so I receive an annual payment from each IRA. The number is based on MY age (minimum deistribution). I designated a % to be withheld for my federal taxes and I receive a 1099R each year.

As executor, I would have been in charge of submitting the death certificate to the IRA bank, but each of the siblings handled their portion the way they wanted.

Hope this helps.

1 Like Save    

Related Stories

Stone 9 Hard Questions to Ask When Shopping for Stone
Learn all about stone sizes, cracks, color issues and more so problems don't chip away at your design happiness later
Full Story
Most Popular Pre-Storage Checklist: 10 Questions to Ask Yourself Before You Store
Wait, stop. Do you really need to keep that item you’re about to put into storage?
Full Story
Feel-Good Home Escape the Inheritance Trap: What to Do With Sentimental Pieces
Too meaningful to toss but too hideous, precious or unusual to display? These ideas can help
Full Story
Kitchen Design 7 Tricky Questions to Ask When Planning Your New Kitchen
Addressing these details will ensure a smoother project with personalized style
Full Story
Selling Your House How to Handle Inherited Things You Don’t Really Want
Whether you’ve inherited a large collection of items or a single bulky piece of furniture, it’s OK to let it go if you don’t need or want it
Full Story
Decorating Guides 12 Questions Your Interior Designer Should Ask You
The best decorators aren’t dictators — and they’re not mind readers either. To understand your tastes, they need this essential info
Full Story
Organizing Can’t Figure Out What ‘Sparks Joy’? Try This Question Instead
If you can’t decide whether to keep something or let it go, shift your perspective to find the answer
Full Story
Decorating Guides 8 Questions to Ask Yourself Before Meeting With Your Designer
Thinking in advance about how you use your space will get your first design consultation off to its best start
Full Story
Most Popular Considering a Fixer-Upper? 15 Questions to Ask First
Learn about the hidden costs and treasures of older homes to avoid budget surprises and accidentally tossing valuable features
Full Story
Van Metre Homes is a homegrown builder with a reputation for blending the enduring traditions, quality and value... Read More
Premier Home Services, Inc. has been providing custom remodeling services to Loudoun County and the Surrounding... Read More