If you want more than one person to receive your account assets, be sure you understand how assets are distributed to your beneficiaries.
When you name your beneficiaries per stirpes for an account held at T. Rowe Price, in the event that one of the beneficiaries predeceases you, his or her share of the account passes to his or her descendants (i.e., children or grandchildren). For example, you listed your daughter, the mother of your grandchild, as the 50% beneficiary, but she predeceases you. Your two bachelor sons survive. You had designated each son to receive 25% of the assets. With the per stirpes distribution method specified for the account, each son still receives 25% of the assets, and your deceased daughter's share of 50% passes to your grandchild.
If any of the following circumstances apply, you may want to name a trust as your account beneficiary:
- You would like to control how the inherited assets are used by the beneficiaries.
- Your intended beneficiary is not experienced or interested in money management, and you want an experienced trustee to manage account assets for that person's benefit.
- You would like the proceeds of your account to benefit both your current spouse and children from a prior marriage. (Ask an estate planning attorney about a specific trust type: the qualified terminable interest property trust, commonly called a QTIP trust.)
- One or more of your beneficiaries has special needs, such as protection from creditors. In this case, leaving account assets outright, without limitations or instructions, may not be in the beneficiary's best interests.
If you are considering establishing a trust, consult with an estate planning attorney. It's important to meet all legal requirements and to understand how your trust will affect distributions to your heirs and how your assets will be taxed.
Sharing your long-term plans for account assets with your beneficiaries now can help them understand the options available to them when they inherit.
- If your spouse is your beneficiary, you can discuss together the advantages and disadvantages of: (1) leaving the assets in an IRA inherited from you, (2) rolling them into an IRA of his or her own, or (3) liquidating the assets immediately.
- If your beneficiary is not your spouse, consider discussing the potential financial rewards of leaving inherited assets in an Inherited IRA to benefit from years of potential long-term tax-deferred growth.
- Educating beneficiaries now can help them learn about their options and increase the likelihood that they will make appropriate financial decisions with the IRA and employer-sponsored plan assets they inherit from you.
At the time of your death, you may or may not have already withdrawn your RMDs for that year. If you have not withdrawn the total RMD amounts required for that year, your beneficiary (or executor if your beneficiary is your estate) will be required to withdraw any amount of your RMD for the year that has not yet been withdrawn. The deadline for doing this is December 31 of the year of your death.
Unfortunately, this responsibility may not be as simple as it sounds. It may be a good idea for your beneficiary to meet with a tax expert or attorney for assistance. Your beneficiary or executor will need to take these steps:
- If you have retirement accounts at several institutions at the time of your death, review all of your retirement account statements to see what distributions have already been taken.
- Contact each custodian (institution where the account is held) to determine if other distributions need to be made.
- Finally, arrange to have any remaining required distributions withdrawn from those accounts by December 31.
The withdrawals made after your date of death will be distributed directly to your beneficiary and all pretax contributions and earnings included in the withdrawal amount will be taxable to the beneficiary as ordinary income. They will not be included with your other taxable income in that year.
Upon your death, your beneficiary (or beneficiaries) becomes the new account owner of that particular retirement account. The options, legal obligations, and deadlines your beneficiary must meet are very detailed and complex.
The good news: There are many tax-advantaged ways for your beneficiary to continue investing the inherited assets. Often, depending on circumstances, an RMD from the account will be required each year. Note that beneficiaries may or may not use the same IRS table and birth date to calculate their RMDs that you did. Depending on whether your beneficiary is your spouse, what withdrawal method the beneficiary chooses, and how old he or she is, his or her withdrawal amount may be greater or smaller than yours.
While retirement account assets usually avoid probate, they are included in your estate for tax purposes.
Depending on the year, and your estate size and disposition, estate tax may be due on retirement account assets at your death. Income taxes will be payable each year by your beneficiaries on the assets they withdraw that year from the IRA or other tax-advantaged account.
Therefore, the longer they keep the assets in a tax-advantaged account, the longer they can defer paying income taxes on the money.
To further maximize the amount that can be inherited tax-deferred by your account beneficiaries, you may wish to specify in your will that any estate taxes due on retirement account assets should be paid from other assets in the estate to the extent possible.
If you are interested in this strategy, you should consult with an estate planning attorney.
These days, being the beneficiary of an IRA or 403(b) account is not as simple as calling the institution holding the assets to ask them to mail you a check.
There are documents you must provide—a death certificate, for example—and there are various dates and deadlines to consider before deciding what to do with the assets.
Although you may ultimately decide to receive the inheritance as a lump sum, there are other tax-advantaged options available.
For example, if you are a spouse beneficiary, you may wish to roll over the assets to an IRA of your own.
If you are a non-spouse beneficiary, you may choose to leave or rollover your IRA or 403(b) into an "Inherited IRA account" and take RMDs over your own life expectancy (certain exceptions apply).
If you elect to only withdraw RMDs, you can withdraw them automatically on a periodic schedule of your choosing. (Note: You can always withdraw more than the RMD amount if you desire.)