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Home>UPDATE: Don't make this mistake with an inherited IRA

UPDATE: Don't make this mistake with an inherited IRA

UPDATE: Don't make this mistake with an inherited IRA

09/29/2017

By Pat Simasko

Advisers and attorneys should be on the same page

Poor communication between financial advisers and attorneys can lead to big missteps with inherited individual retirement accounts.

The issues stem from a 2014 landmark ruling by the Supreme Court that says assets held in inherited IRAs are no longer protected from creditors and can be seized during events such as divorce or bankruptcy. Following that ruling, designating a trust rather than an individual as the beneficiary of a qualified account has become a popular and effective asset-protection strategy.

Creating the trust, however, is just one step in the process. Big problems can emerge during the actual transfer of assets from the former owner of the IRA into the trust itself.

That's because the 60-day rollover rule--which allows someone to take tax-free distributions from a qualified account if they reinvest those assets in another qualified account within 60 days--doesn't apply in the case of inherited IRAs. Should those assets pass to the successor trustee, the distribution is taxable as ordinary income regardless of whether it is reinvested within the required window. There must be a direct transfer from one custodian to the next beneficiary IRA custodian. An attorney unfamiliar with that nuance could potentially cost someone tens of thousands of dollars.

There also are cases where a misunderstanding on the part of the IRA's custodian results in a claim being processed incorrectly and a distribution being made to a nonqualified account, triggering a taxable event.

In the case of an inherited IRA, attorneys and advisers should sit down together to review each step of the transition process and to verify that the institution that holds the IRA understands exactly how to handle the transfer. There's too much at stake for estates not to be executed perfectly.

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