Planning Ahead When Handling Your IRA and Estate

When you think about IRAs, you might think about retiring. But what happens to your money from the IRA once it\’s finally time for your passing? The answer depends on how carefully you build your estate plan and choose proper recipients. The fact is, you might be surprised to see your money end up with the wrong person or cause an unexpected tax bill if you don\’t take action on time. At Davis, Ermis & Roberts, P.C. in Arlington, TX our team of highly skilled attorneys has been helping families throughout the Dallas-Fort Worth, TX area for years to handle a wide variety of legal matters including estate planning and how to properly manage an IRA.

An individual retirement account (IRA) is often one of the largest financial accounts that you invest in throughout your life. When working on trusts, wills, and other documents included in your estate plan, you must consider all the \”big things\” like your IRA, your home, and your small business. Unlike the way we use some trusts for your family, IRAs have limited choices for life-long planning. IRAs are also subject to income tax (yes, even those you inherit), even though property or death taxes only apply to large properties above $ 5.49 million. This means it is a common decision to leave your IRA to a partner, but you cannot expect your IRA to be automatically distributed to your surviving spouse. Your partner must be explicitly identified as an heir via the appropriate recipient form. 

Common Mistakes Related to Managing an IRA

One of the most common mistakes people make is not keeping up to date with the current situations of their IRA beneficiaries after a divorce, childbirth, grandchildren, or other important life events that will change the choice of beneficiaries. Another wrong step to avoid is naming your estate as your IRA recipient. If you designate beneficiaries as spouses or children, they can add to this money over time using a function called \”stretch\” from these accounts. If your estate is a beneficiary, the money will be transferred to your loved ones in only five years (and maybe even faster), which will result in taxation that is much faster (and often higher) and stops the potential growth of your IRA over time.

If you choose to hand over your IRA to your young children, you can create a situation that isn\’t ideal by forgetting to appoint a guardian to monitor the IRA until your children are old enough to inherit. Without a legal guardian, IRAs handed over to minors can go to an ex or other adults with whom you might not want to share your wealth. Better than a legal guardian, you can build an IRA trust to maintain an IRA distribution that provides long-term financial support to your children or grandchildren and protects them from dangerous influences that you don\’t want to leave your children to deal with.

Pay Close Attention to Income Tax

It is important that you meet with an experienced estate planning lawyer to determine how your IRA is taxed and take action accordingly. For those who have large properties, insurance policies and life insurance can be deducted to offset the estate tax costs for your recipient. Remember that in addition to property taxes for large lots, your IRA distribution also triggers income tax for your recipient, regardless of the size of your property. Roth IRAs are income tax exemptions for beneficiaries. You can check with an attorney, your tax advisor, and your financial planner whether the Roth IRA makes sense. As with many legal, tax and financial strategies, there is no suitable solution for everyone.

Because property taxes and income taxes arise when IRAs are passed on to beneficiaries, they are a great way to include charitable contributions in your estate plans. If you donate the value of an IRA to your charity, you will receive a reduction in charitable donations, as well as an opportunity to avoid losing income tax on the IRA. If you are interested in using your church or other charitable activities, it is always a good idea to find out what your best course of action will be during a conversation with your attorney and financial advisor.

Ask Davis, Ermis & Roberts P.C. in Arlington, TX for Guidance

If you’re worried about how to properly manage your IRA or other aspects of your estate, then your best option is to reach out to an experienced attorney as soon as possible. At Davis, Ermis & Roberts P.C. in Arlington, TX our team of highly skilled attorneys has been working with residents throughout the DFW Metroplex for years on a wide variety of legal matters including estate planning. To find out more about our services, or to schedule a consultation with a member of our team, don’t hesitate to contact us right away.