It might be inconceivable to some that the beneficiary of an individual retirement account would disclaim it. However, a beneficiary might have sound reasons for taking this step. The effects of disclaiming depend on how the IRA owner filled out the beneficiary form.
If you wish to disclaim an IRA, you can do so, in writing, within nine months of the owner’s death. This action is irrevocable once taken. The IRA trustee then distributes your portion based on the owner’s instructions. You might have to take a required minimum distribution if you don’t immediately disclaim the IRA. This doesn’t compromise your right to disclaim. The default rule is “per capita” distribution, meaning that your disclaimed portion is split between the other primary beneficiaries, or if there aren’t any others, the contingent beneficiaries. The owner can instead opt for “per stirpes” distribution, in which your portion goes to your heirs.
A Parent’s Love
You might prefer that your children get the IRA inheritance. If the owner was your spouse, you can assume ownership of the inherited IRA and name your children as the beneficiaries. This means your children must wait for your demise before collecting. If you don’t want them to wait and your spouse set up the beneficiary form correctly, you can disclaim the IRA and let it go to your children. They can withdraw the assets as a lump sum or take annual distributions based on the age of the oldest beneficiary or the age of the deceased as of his birthday in the year he died.
Having and Eating Your Cake
Credit shelter trusts, also known as “AB Trusts,” offer an incentive for a spouse to disclaim the inherited IRA. An IRA owner can name his spouse as the sole primary beneficiary and the trust as the contingent beneficiary. In turn, the credit shelter trust names the owner’s children as its beneficiaries. Upon the owner’s death, the spouse disclaims a portion of the IRA. The remainder then goes to the credit shelter trust, and thus to the children. The advantage of this technique stems from the portion of the IRA that the spouse disclaims. As long as this amount is no greater than the estate tax exemption, the children escape estate tax liability. In 2013, the estate tax exemption is $5.25 million.
Who Needs It?
You might disclaim an IRA because you don’t need the money. If you are wealthy, you might be looking for ways to reduce your estate, not increase it. Accepting an IRA from a non-spouse means that you have to pay any associated estate taxes. All beneficiaries must pay income tax on the required distributions. Some wealthy individuals who dislike paying taxes might prefer to disclaim an IRA rather than increase their tax bills. Finally, you might inherit an IRA from a person you don’t like. You could disclaim it on general principles.Click here for reuse options!
Copyright 2017 Eric Bank, Freelance Writer