Taking care with IRAs and estate planning

Many New Yorkers have individual retirement accounts. They can be problematic for estate planning purposes as the IRS considers them to be income that the decedent would have otherwise received and thus in some cases taxable to the estate.

In many cases, a decedent who had an IRA failed to update beneficiaries or to name them on the account, which can also be an issue after they die. Careful drafting of estate documents must be undertaken in order to avoid problems created by the existence of an IRA. When IRAs are treated as income to the estate by the IRS after death, the amounts that are distributed are subject to the highest income tax bracket of 39.6 percent. This may mean that, although the estate would otherwise fit under the estate tax exemption amount, the IRA itself may face significant taxation.

Some people try to avoid this issue by naming a trust as the beneficiary to their IRAs. They then designate charities as beneficiaries to the trust. Care must be taken even when doing this. If the income from the IRA goes to the trust, the IRS may treat it as taxable. If the portion from the IRA instead goes to the residual portion from the trust, and from there, to the designated charities, the income is considered to pass to the charity instead of to the trust. This can help since charities are tax-exempt.

Estate planning and estate administration may be highly complicated. People who need help may want to talk with an estate planning and administration lawyer. An attorney may be able to provide guidance regarding the best way to handle the person’s estate planning goals and needs. They may also be able to reform a pre-existing trust that was drafted incorrectly by filing motions to do so with the court. It is possible to minimize taxes if the documents are drafted correctly.