Can I Decline an Inherited IRA?

The rules governing inherited Individual Retirement Accounts (IRAs) have changed over the years. They have become even more complex since the passage of the original SECURE Act with the passage of SECURE 2.0. The inheritor of an IRA may be required to empty the account and pay taxes on the resulting income within 10 years. In some situations, beneficiaries might choose to execute a Qualified Disclaimer and avoid inheriting the IRA, according to a recent article, “How to Opt Out of Inheriting an IRA” from Think Advisor.

Paying taxes on the distributions could put a beneficiary into a higher tax bracket. In some situations, beneficiaries may want to execute a Qualified Disclaimer and avoid inheriting both the account and the tax consequences associated with the inheritance.  Sometimes clients would rather pass wealth to another person or later generation, and income producing assets such as IRAs are attractive options for that.

Individuals who use a Qualified Disclaimer are treated as if they never received the property at all. Of course, you don’t enjoy the benefits of the inheritance but don’t receive the tax bill.  See here for more on how disclaimers work.  https://galligan-law.com/can-you-refuse-an-inheritance-disclaimer/

Suppose the decedent’s estate is large enough to trigger the federal estate tax. In that case, generation-skipping transfer tax issues may come into play, depending on whether there are any contingent beneficiaries.

An experienced estate planning attorney is needed to ensure that the disclaimer satisfies all requirements and is treated as a Qualified Disclaimer. It must be in writing, and it must be irrevocable. It also needs to align with any state law requirements.

The person who wishes to disclaim the IRA must provide the IRA custodian or the plan administrator with written notice within nine months after the latter of two events: the original account owner’s death or the date the disclaiming party turns 21 years old. The disclaiming person must also execute the disclaimer before receiving the inherited IRA or any of the benefits associated with the property.

Once the disclaimer is made, the inherited IRA must pass to the remaining beneficiaries without the disclaiming party’s involvement.

This is very important, but the disclaiming party cannot decide who will receive their interests, such as directing the inherited IRA to go to their child. Instead, the asset goes to the next beneficiary as if the disclaimer passed away before the account holder.  If the disclaiming party’s child is already named as a beneficiary, their interest will be received as intended by that child.

The person inheriting the account must execute the disclaimer before receiving any benefits from the account. Even electing to take distributions will prevent the disclaimer from being effective, even if the person has not received any funds.

In some cases, you may be able to disclaim a portion of the inherited IRA. However, these are specific cases requiring the experience of an estate planning attorney.

Reference: Think Advisor (Feb. 8, 2024) “How to Opt Out of Inheriting an IRA”

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6 Things Seniors Should Consider Before Marrying

Seniors in particular think about marrying with an understandable degree of concern. Maybe your last relationship ended in a divorce, or it’s been a long time since they were married. However, according to a recent article from MSN, “Planning to remarry after a divorce? 6 tips to protect your financial future,” there are some steps to take to make relationships easier to navigate and protect your financial future.

Not all of them are easy, but all are worthwhile.

1.No marrying without a prenup. Everyone thinks of prenups as pertaining to divorce.  They can address divorce, but prenups do much more.  They clarify property in the marriage, such as whether it will belong to one spouse or to the other or both.  Prenups clarify many issues: full financial clarity, financial expectations, the marital rights of the couple and clear details on what would happen in the worst case scenario. This is especially important to putting each of the couples’ respective families at ease as they marry.  Getting all this out in the open before you say “I do” makes it much easier to go forward.

2.Trust…but verify. Estate planning ensures that assets pass as you want. A revocable living trust set up during your lifetime can be used to ensure your assets pass to your offspring. Unlike a will, the provisions of a revocable trust are effective not just when you die but in the event of incapacity. A living trust can provide for the trust creator and their children during any period of incapacity prior to death. At death, the trust ensures that beneficiaries receive assets without going through probate.

3.Estate planning. While you are planning to marry is a good time to check on account titles, beneficiary designations and powers of attorney, both medical and financial. Couples should review their estate plans to be sure planning reflects current wishes. This will go a long way to avoiding fights between the respective families who just recently joined together.

4.Check beneficiaries. Especially after divorce and before a remarriage, check beneficiaries on 401(k)s, pensions, retirement accounts and life insurance policies. If you marry, state law may require you to give some portion of your estate to your spouse or otherwise affect your ownership of property.  In many cases, this can be addressed by a prenup, but you still want to consult an estate planning attorney to guide you through any changes to beneficiaries.

5.Medicaid Planning.    On the negative side, you should consider the likelihood that either party will need help paying for long term care BEFORE marrying.  Medicaid, which is a government benefit that helps pay for long term care, has different eligibility based upon the marital status of the applicant.  Medicaid also expects both spouse’s assets to be used for care which has nothing to do with the prenup.  So, for some individuals, it doesn’t make sense financial to marry where one party will need long term care.

6.Choose fiduciaries wisely. The fiduciaries named in your estate plan are the people who have tasks to fulfill.  This could be a trustee, an executor, an agent and so on.  Consider carefully who should fill these roles as they may have to be between the two families.  Consider the advantages of a corporate trustee, who will be neutral and may prevent tensions with a newly blended family. If an outsider is named as an executor, or to act as a trustee, they may be able to minimize conflict. They’ll also have the professional knowledge and expertise with legal, tax and administrative complexities of administering estates and trusts.

Reference: MSN (Feb. 11, 2023) “Planning to remarry after a divorce? 6 tips to protect your financial future”

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Some Expenses Increase with Retirement

When considering retirement, many clients wisely consult with their financial advisors to ensure they have sufficient means to stop working.  Some, however, do not, or make the mistake of assuming their ability to retire based upon their current expenses.  However, they fail to consider just how much some expenses will increase.

U.S. households led by an individual who is 65 or older spend an average of $7,030 a year on health care, according to the Bureau of Labor Statistics’ latest data on consumer spending, which is for 2021.

Money Talks News’ recent article entitled “How Much Retirees Actually Spend on Health Care in the U.S.” says this translates to about 13% of the total spent each year by senior households ($52,141) and makes health care the second-largest spending category among those households. Only housing accounted for a bigger share of seniors’ spending in 2021. By comparison, all U.S. households spend an average of $5,452 a year on health care, which translates to about 8% of spending across all households ($66,928).

Here’s a detailed look at how senior households’ medical spending breaks down.

Health insurance. The average spending for a U.S. household led by someone age 65 or older is $4,974 per year. By comparison, the average spending across all U.S. households is $3,704 per year. Insurance is without a doubt the biggest health care expense for households of any age, but it’s highest for senior households. They spend $4,974 — around $415 a month — on insurance on average—roughly 10% of their total spending.

Medical services. The average spending for a U.S. household led by someone age 65 or older is $1,077 per year, compared to the average spending across all U.S. households at $1,070 per year. This type of health care expense includes a wide variety of care, such as:

  • Hospital room and services
  • Healthcare professionals
  • Eye and dental care
  • Lab tests and X-rays
  • Medical care in a retirement facility; and
  • Care in a convalescent or nursing home.

Drugs. The average spending for a U.S. household led by someone age 65 or older on medications is $726 per year, as opposed to $498 per year for the average spending across all U.S. households. This includes spending on prescription and nonprescription medications, as well as vitamins.

Medical supplies. The average spending by a U.S. household led by someone age 65 or older is $253 per year. The average spending across all U.S. households is $181 per year. This type of spending covers:

  • Various supplies, such as dressings, antiseptics, bandages, first aid kits, syringes, ice bags, thermometers and heating pads
  • Medical appliances, like braces, canes, crutches, walkers, eyeglasses and hearing aids; and
  • Rental and repair of medical equipment.

Housing.  Very rarely does a client tell me they don’t want to live in their home.  However, we all have to consider an increase in housing expenses if health won’t let us live at home.  The average costs of a nursing home in the Houston areas is less than $6,000.  Several of the places you’d prefer to live at are in the $7,000 to $10,000 range.  When I practiced in upstate New York it wasn’t uncommon to deal with nursing homes that cost $12,000 or more.  Many clients fail to consider these costs, which is why we end up discussing Medicaid for these costs.

If you are interested in this topic, you can see here for more:  https://galligan-law.com/elder-law-questions/  

Additionally, clients assume they can live at home with the aid of a professional care giver.  If health is such a concerned you need to be under the supervision of a doctor, then this won’t cover it.  Even if it does, and many people use this for a limited time, the cost isn’t much less.  Most services will cost between $20-25 an hour easily.  Let’s assume you only need 8 hours of care at that rate.  Assuming 30 days a month and $20 an hour, you are talking about $4,800.  Most people using this service need more hours.  In short, the cost is there regardless.

Reference: Money Talks News (Oct. 25, 2022) “How Much Retirees Actually Spend on Health Care in the U.S.”

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