Inheritance Taxes? I Don’t Have Any Inheritance Taxes!

inheritance taxes


There are taxes and then there are inheritance taxes. Most individuals do not think that they will ever have to worry about inheritance tax issues because they do not make a lot of money, have few assets or are deep in debt. This is a financial fallacy and your miscalculation could be expensive.

Avoid Inheritance Tax Surprises

Many unprepared taxpayers will regret the day they thought that their personal financial situation kept them out of the complicated mess of inheritance taxes. Your financial situation has little to do with inheritance money.

Different types of investments are handled differently at the time they are inherited. Some are easier to manage than others.

One investment type in particular that can become complicated when it comes to the issue of taxation at inheritance time are Individual Retirement Accounts (IRAs). The best way to avoid being caught off guard with an inheritance tax problem if you inherit an IRA is to learn some key rules.

Beneficiary Designation Is The Key

The beneficiary designation form held by the IRA custodian, not a will or living trust will determine who inherits and pays inheritance taxes on an IRA.

The important things to remember:

  • Make sure to not lose or misplace the beneficiary designation forms
  • Be certain that a beneficiary is named, many people do not name a beneficiary
  • Keep the beneficiaries up-to-date, many times after a beneficiary dies a replacement one is not named

Children Beware

If children inherit an IRA and roll it over into their own IRAs, the entire inherited IRA would be hit with inheritance taxes. The IRS views this rollover from a non-spouse as a distribution.

To avoid this mistake an inherited IRA must be maintained and then retitled by September 30th of the year after the year of the original owner’s death.

Spouses Are A-Okay

Surviving spouses can rollover the inherited IRA into a new IRA in their name.  The spouse can then name new beneficiaries and start a new required minimum distribution schedule that would be based on their own age.

If the surviving spouse does not roll the inherited IRA into a new IRA, the required distributions will begin shortly after the IRA is inherited.

Your Inheritance, Your Problem

Unfortunately many financial institutions and financial advisors are unfamiliar with the finite details of the inheritance tax issues that come with IRAs. Many simply ask what you want to do with your newly inherited money with little regard for tax consequences. They are not tax advisers therefore are not familiar with all of the rules. Your best move is to learn as much as you can about IRAs and the tax issues involved before you inherit one.