Inherited IRAs: Insights from a Probate Attorney

By Carolyn S. Smith, Esq.

As a probate attorney, it is very common to deal with beneficiary inherited Individual Retirement Accounts (IRAs). Most people have either never heard of a beneficiary IRA or do not understand how they work. In this blog, I would like to offer insights into the legal landscape surrounding inherited IRAs, shedding light on key considerations that beneficiaries should be aware of.

A beneficiary IRA is an IRA that is inherited by an individual who was designated as a beneficiary by the original account holder, also known as the decedent. When the decedent passes away, the assets held in the IRA can be transferred to one or more beneficiaries, who then establish beneficiary IRAs to receive and manage the inherited funds.

At the time the IRA was established, the decedent should have designated one or more beneficiaries to receive the assets upon their death. Beneficiaries can be individuals, such as family members, friends, or charitable organizations, or entities like trusts or estates.

Upon the death of the decedent, the IRA custodian is notified, either by the decedent’s family members or the probate attorney, and the account is frozen until the beneficiary designation and inheritance process is completed.

Probate attorneys can help the designated beneficiaries initiate the inheritance process by obtaining necessary documentation from the IRA custodian.  The attorney can then help the beneficiaries execute the documentation and forward it to the IRA custodian for processing along with a certified copy of the decedent’s death certificate.

Beneficiaries of inherited IRAs have several distribution options available to them, depending on the type of IRA inherited, the relationship to the deceased owner, and other factors. These options may include taking a lump-sum distribution, withdrawing funds over a specified period, or "stretching" distributions over the beneficiary's life expectancy to maximize tax deferral.

Taxes are a significant aspect of inherited IRAs. It's important to note that distributions from beneficiary IRAs may be subject to income tax, depending on the type of IRA and the distribution option chosen by the beneficiary. Traditional IRA distributions are generally taxable as ordinary income, while qualified distributions from Roth IRAs are tax-free. Beneficiaries must navigate the complexities of required minimum distributions (RMDs) and potential income tax liabilities associated with distributions. Failing to comply with RMD requirements can lead to substantial penalties, underscoring the importance of seeking guidance from tax professionals to develop tax-efficient strategies tailored to individual circumstances.

Overall, beneficiary IRAs allow individuals to inherit retirement assets from a decedent and manage those assets according to their own financial needs and objectives, subject to applicable tax and distribution rules.  It is important to work with a knowledgeable probate attorney and tax consultants to understand the financial implications of inherited IRAs and to help avoid tax liabilities associated with the inheritance.