How Much Will I Really Spend in Retirement? – Annapolis and Towson Estate Planning

People are living longer today compared to previous generations. This means that their retirement savings need to last longer. As a result, you’ll need to be certain that you’re calculating your retirement spending accurately.

Kiplinger’s recent article, “Planning for Retirement? You’re Probably Underestimating Your Spending,” explains that general figures and trends don’t consider a person’s health and many other factors. Still, you should anticipate a lengthy retirement, which makes it even more critical to understand your cash flow and break out your expenses.

It’s not uncommon for people to totally underestimate their post-retirement spending. They don’t see the many additional expenses they’ll incur after ending their employment or selling their business. The common notion is that as you get older, you spend less. However, there are new expenses that come with retirement and current costs that you may not be accounting for.

Let’s look at the four main types of expenses that prospective or new retirees need to plan when creating a budget. Educating yourself in these areas will help to have a comfortable retirement.

  1. Formerly business-subsidized expenses. For many, the job provides more than a salary. It can include health benefits, cell phones and health club memberships. To avoid some surprise when you retire, make a list of the expenses that are now covered by your employer or business. Some you might be able to do without, while others may be a necessity in retirement.
  2. Overlooked expenses. Many people do the majority of their primary spending on one credit card. However, when they estimate their spending for retirement, they forget about spending on other credit cards and regular services and charges that may be paid for by cash or check, such as landscaping, housekeeping and real estate taxes. Prior to retirement, go through all your expenses and how they’re being paid. This should help flesh out a thorough understanding of your spending.
  3. Health care expenses. Even if you hit retirement without a major accident or illness, you’re still probably going to spend a good portion of your income to stay that way. A recent study found that a healthy male-female couple retiring at 65 in 2019 can expect to spend $285,000 on health care over their retirement years. Medicare begins at 65 and covers many expenses, but there are many common health care costs that are not covered, such as dental and vision services, prescription drugs (unless you buy a supplemental plan, such as Part D), and long-term care. Out-of-pocket costs can also shoot up if a senior has a serious or chronic disease, like a heart condition.
  4. Recurring non-recurring expenses. You may get a new car or need a major repair in your house. These are considered non-recurring expenses you commit to sparingly or just once in your life. However, big purchases and unexpected costs occur more often than you’d imagine. It’s a good practice to plan for at least one “one-time purchase” each year to cover these unanticipated bills.

Reference: Kiplinger (October 3, 2019) “Planning for Retirement? You’re Probably Underestimating Your Spending”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

What’s the Best Way to Gift an Interest in My Business? – Annapolis and Towson Estate Planning

A couple who owned a small family business was thinking about giving interests in the business to their married son over time. However, they were worried about the “what if” scenario of a possible divorce in his future. If their son divorced, they didn’t want to be in business with his ex-wife.

Forbes’s recent article, “What Family Businesses Need To Know About Gifting Business Interests,” explains that prior to the couple transferring some of their business to their son, they asked their attorney to draft a shareholder agreement with restrictions on to who the stock can be transferred in the future. The parents’ goal was to keep the stock from being transferred as part of a potential divorce. In our scenario, the parents want their daughter-in-law to sign a consent agreeing that she would be bound by the shareholder agreement and that the stock would never be transferred to her. If their son and his wife later divorced, she’d be bound by the agreement and the stock would remain with the son.

While the parents’ plan sounds like a great idea, it is in theory. However, the reality is that there’s a good chance of a far different and less desirable result. Let’s examine three ways this type of agreement could become a big headache.

  • Creating a big, icky issue. Ask yourself if you really want to ask your daughter-in-law (or son-in-law) to sign this? This may open a big can of worms in your family. If she didn’t think there was any value in the business, she may feel differently when she reads the agreement. Thanksgiving dinner may end up in a food fight!
  • Is it legal? Ask your attorney to analyze how effective the agreement would be under the laws that apply to the agreement and in the state where the couple may divorce.
  • How much protection does it offer? In many states, the agreement wouldn’t remove the stock as a marital asset. Even if the stock stays on the husband’s side of the balance sheet, its value would still be subject to division, and the wife could get other marital assets to balance things out.

An alternative might be the use of a marital agreement, like a prenuptial or post-nuptial agreement. The family business may be better protected with the son having an agreement that states that the stock is outside the marital estate and not subject to division in the event of divorce. Of course, the parents can’t force their son to enter into the agreement, but they can stop the gifting spigot if he doesn’t.

Speak with your attorney and look at all your options to find the strategies that will work best for your business and your family.

Reference: Forbes (October 9, 2019) “What Family Businesses Need To Know About Gifting Business Interests”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

What Do I Need to Know About an Irrevocable Life Insurance Trust? – Annapolis and Towson Estate Planning

An irrevocable life insurance trust (ILIT) is a trust that can’t be rescinded, amended, or modified after it’s created. ILITs are made with a life insurance policy as the asset owned by the trust. Once the grantor places property or life insurance death benefits into the trust, she can’t alter the terms of the trust or reclaim any of the properties held by it.

As an alternative to designating an individual beneficiary, ILITs offer several legal and financial advantages to heirs. This includes favorable tax treatment, asset protection, and the assurance that the benefits will be used in a manner concurrent with the benefactor’s wishes.

Investopedia’s recent article, “When Is It a Good Idea to Use ILIT Trust?” says that there are several advantages to ILITs, including state tax considerations, the protection of fiscally-careless beneficiaries from squandering their payouts and the prevention of courts and creditors from accessing the assets.

An ILIT is often used to set aside assets for certain purposes, like paying estate taxes, because these assets themselves aren’t taxable. To do this, the selected assets must be moved into the life insurance trust at least three years before they’re used. If you use a qualified estate planning attorney to create this, the death benefits paid to the ILIT won’t be included in the gross estate of the insured. This is different than when life insurance death benefits are paid to an individual because the proceeds are included in the taxable estate of the decedent.

The ILIT also has asset protection for the beneficiaries if they are involved in a lawsuit. That’s because ILITs aren’t considered to be owned by the beneficiaries. This makes it hard for courts to connect the assets to the beneficiary, making them nearly impossible for creditors to access.

There are some drawbacks to using an ILIT, so carefully consider the pros and cons of creating one. Changes to an ILIT can only be made by the beneficiaries. As a result, the benefactor loses control of the assets prior to death.  ILIT assets also are not taxed as part of the estate, but they are taxed as part of the beneficiaries’ estates, leaving a bigger tax burden to their descendants.

Preparing an ILIT is a sophisticated matter with strict guidelines that must be followed to ensure that it conforms with IRS guidelines. Talk with an experienced estate planning attorney to be sure that it is prepared properly, and that it aligns with your overall estate plan.

Reference: Investopedia (August 5, 2019) “When Is It a Good Idea to Use ILIT Trust?”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

How to Enjoy Life After Retirement – Annapolis and Towson Estate Planning

By the time they reach retirement age, some people are so burned out, bitter, or damaged that they feel incapable of experiencing joy or happiness. After a lifetime of hard work, they are miserable. For many people, the only thing they enjoyed in life was their career. When they stop working, they feel lost and adrift. If you are feeling any of these things, you could use a roadmap on how to enjoy life after retiring.

You have spent the last several decades working to provide for and take care of yourself and your family. The vast majority of your waking hours were spent doing what needed to get done with little time, money, or energy left for doing what you wanted to do.

You might have had to deal with difficult bosses, marital troubles and financial crises. When you look back on your working life, you might feel dissatisfied with the compensation you received for your labors.

Shifting Your Focus

Continuing to approach life the same way you did during your career, might not bring you the happiness you would like in retirement. People who find fulfillment in their golden years often shift their focus from the concerns of making a living and raising a family to exploring other dimensions of life.

Regardless of how well you took care of yourself and how blessed you are with good health, eventually, your body will begin to lose strength and endurance. You can consider this reality a loss or a natural process.

Many people pay more attention to their spirituality or religion after retirement. They think about what matters and step away from things that do not bring them joy. Decluttering your life can be a lot like cleaning out a closet. You get rid of things you no longer need or want and unearth things you forgot were there.

It can be liberating to get away from toxic co-workers who brought you years of stress. You can replace them by looking up old friends or making new ones.

If you feel useless or not needed, you will not have fulfillment. After your career is behind you, it can be hard to figure out who you are and what you can contribute to society.

Finding a type of volunteer work can make you feel valuable and happy. Some people get such a rush from volunteering that they commit to it more than they should. When this happens, the person becomes unhappy and wonders what else to try, thinking that helping others made the volunteer miserable. In reality, being overscheduled made him unhappy. Simply cut back on your activities, until you find the right pace for you.

Everyone has valuable skills to teach others. If you can read, draw, play chess, sew, bake, create a budget, plant a garden, or any other task, someone out there wants to learn what you know. You do not need a Ph.D. to teach others useful life skills.

Be sure to give yourself the free time and solitude you want. Balance those aspects with stimulating social activities to stay connected and keep your brain healthy. You have earned this time, now enjoy it.

References: HuffPost. “How To Find Fulfillment In Life After Retirement.” (accessed October 9, 2019) https://www.huffpost.com/entry/how-to-find-fulfillment-i_b_11887068

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Make Your Home Safe and Comfortable for You to Age in Place – Annapolis and Towson Estate Planning

You love your house and you want to live in it through your retirement. With intelligent design features, you can make your home safe and comfortable for you to age in place.

With the right information and professionals, you can create a beautiful yet functional space for your golden years. Do not assume you will have to relocate just because you reach a certain age.

Assisted living facilities and other forms of long-term care centers are usually far more expensive than living at home and getting a little help with tasks like the yard work and house cleaning. Of course, if you have significant medical needs, aging in place might not be an appropriate option for you. You and your doctor should talk about your needs and options.

Whether to Do New Construction or Retrofit Your Existing Home

If you have a much larger house than you need and your children have now grown up and moved away, you might save yourself a lot of money by selling that home and having a house built that incorporates all the features you want for aging in place. You should only have the square footage you need on a daily basis for your golden years home to be cost-effective and something you can maintain.

It can be hard for people to let go of hosting the family get-togethers, but one reaches a point at which the next generation should take on this responsibility. Having square footage that goes unused most of the year will put a drain on your future budget. When you downsize the square footage, you should only keep the furniture you will need in the new space. Trying to cram too much stuff into a smaller space will make your home crowded and take away the beauty and function.

Whether you are having a new, smaller house built or retrofitting your existing home, you should discuss these essential features with your contractor:

  • Entries should not have steps. Multiple levels will be hard to navigate if you become less mobile and steps are a tripping hazard.
  • Stairs can be dangerous, especially if you use a cane or walker or if you take medications that can affect your balance. You should have a one-story house with no second floor and no basement.
  • Your faucets and door handles should be levers, not knobs. It can be hard to grip and turn knobs, particularly with arthritis or weakness of the hands.
  • All interior and exterior doorways should be at least 36 inches wide, and hallways should be 48 inches wide. You will not be able to get a wheelchair through a narrow door or hallway.
  • Make sure you can reach all the power outlets and switches from both a sitting and standing height.
  • Talk with your contractor about the recommended counter height for your situation.
  • A lower height sink in the kitchen and bathroom can make many tasks easier and safer. A 30-inch height with open space under the sink is ideal.
  • Your shower should have a no-step entry.
  • Make sure that your contractor uses the Aging-in-Place Remodeling Checklist of the National Association of Home Builders.

Depending on the circumstances, it might be less expensive to sell your existing house and have a smaller one built, rather than to make extensive modifications to an older home for you to age in place.

References: HuffPost. “Designing A Home ot Age In Place, With Grace.” (accessed October 9, 2019) https://www.huffpost.com/entry/designing-a-home-to-age-in-place-with-grace_b_5791390ce4b0a86259d1029e

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

How Can Beneficiary Designations Wreck My Estate Plan? – Annapolis and Towson Estate Planning

It’s not uncommon for the intent of an individual’s will and trust to be overridden by beneficiary designations that weren’t chosen carefully.

Some people think that naming a beneficiary should be a simple job and they try to do it themselves. Others don’t want to bother their attorney with what seems like a straightforward issue. A well-intentioned financial advisor could also complete the change of beneficiary form incorrectly.

Beneficiary designations are often used for life insurance and retirement benefits, but more frequently, they’re also being used for brokerage and bank accounts. People trying to avoid probate may name a “payable on death” beneficiary of an account. However, they don’t know that doing this may undermine their existing estate plan. It’s best to consult with your attorney to make certain that your named beneficiaries are consistent with your estate planning documents.

Wealth Advisor’s “7 Ways That Beneficiary Designations Can Mess Up Your Estate Plan” lists seven issues you need to think about when making your beneficiary designations.

Cash. If your will leaves cash to various people or charities, you need to make certain that sufficient money comes into your estate so your executor can pay these gifts.

Estate tax liability. If assets do pass outside your estate to a named beneficiary, make certain there will be sufficient money in your estate and trust to pay your estate tax lability. If all your assets pass by beneficiary designation, your executor may not have enough money to pay the estate taxes that may be due at your death.

Protect your tax savings. If you have created trusts for estate tax purposes, make sure that sufficient assets flow into your trusts to maximize the estate tax savings. Designating individuals as beneficiaries instead of your trusts may defeat the purpose of your estate tax planning. If there aren’t enough assets in your trust, the estate tax provisions may not work. As a result, your heirs may eventually end up paying more in taxes.

Accurate records. Be sure the information you have on the change of beneficiary form is accurate. This is particularly important if the beneficiary is a trust—the trust name, trustee information and tax identification number all need to be right.

Spouses as beneficiaries. Many people name their spouse as the primary beneficiary of their life insurance policy, followed by their trust as the secondary beneficiary. However, this may defeat your estate planning, especially if you have children from a first marriage, or if you don’t want your spouse to control the assets. If your trust provides for your surviving spouse on your death, he or she will be taken care of from the trust.

No last minute changes. Some people change their beneficiary designations at the last minute because they’re nervous about assets flowing into a trust. This could lead to increased estate tax payments and litigation from heirs who were left out.

Qualified accounts. Don’t name a trust as the beneficiary of qualified accounts, like an IRA, without consulting with your attorney. Trusts that receive such qualified money need to contain special provisions for income tax purposes.

Be sure that your beneficiary designations work with your estate planning rather than against it.

Reference: Wealth Advisor (October 8, 2019) “7 Ways That Beneficiary Designations Can Mess Up Your Estate Plan”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

How Can I Make Amendments to an Estate Plan? – Annapolis and Towson Estate Planning

If you want to make changes to your estate plan, don’t think you can just scratch out a line or two and add your initials. For most people, it’s not that simple, says the Lake County Record-Bee’s recent article “Amending estate planning documents.” If documents are not amended correctly, the resulting disappointment and costs can add up quickly.

If you live in California, for example, a trust can be amended using the method that is stated in the trust, or alternatively by using a document—but not the will—that is signed both by the settlor or the other person holding the power to revoke the trust and then delivered to the trustee. If the trust states that this method is not acceptable, then it cannot be used.

In a recent case, the deceased settlor made handwritten notes—he crossed out existing trust language and handwrote his revisions to a recently executed amendment to his trust. Then he mailed this document, along with a signed post-it note stuck on the top of the document, to his attorney, requesting that his attorney draft an amendment.

Unfortunately, he died before the new revision could be signed. His close friend, the one he wanted to be the beneficiary of the change, argued that his handwritten comments, known as “interlineations,” were as effective as if his attorney had actually completed the revision and the document had been signed properly. He further argued that the post-it note that had a signature on it, satisfied the requirement for a signature.

The court did not agree, not surprisingly. A trust document may not be changed just by scribbling out a few lines and adding a few new lines without a signature. A post-it note signature is also not a legal document.

Had he signed and dated an attachment affirming each of his specific changes made to the trust, that might have been considered a legally binding amendment to his trust.

A better option would be going to the attorney’s office and having the documents prepared and executed.

What about changes to a will? Changing a will is done either through executing a codicil or creating and executing a new will that revokes the old will. A codicil is executed just the same way as a will: it is signed by the testator with at least two witnesses, although this varies from state to state. Your estate planning attorney will make sure that the law of your state is taken into consideration when preparing your estate plan.

If you live in a state where handwritten or holographic wills are accepted, no witnesses are required and changes to the will can be made by the testator directly onto the original without a new signature or date. Be careful about a will like this. Even if legal, it can lead to estate challenges and family battles.

Speak with an experienced estate planning attorney if you decide that your will needs to be changed. Having the documents properly executed in a timely manner ensures that your wishes will be followed.

Reference: Lake County Record-Bee (October 5, 2019) “Amending estate planning documents.”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

How to Keep Giving After We Are Gone – Annapolis and Towson Estate Planning

Americans are a generous people, giving of our time and resources through donations and volunteering. However, according to the article “Charitable conundrum: Why do we give up on giving at death?” from the Austin Business Journal, less than one out of nine individuals include a charitable donation as part of their estate plan.

Why do we stop giving at death? We know that the causes we care about continue to work after we are gone. There are many reasons for this, but perhaps the biggest reason behind his omission is that we tend to avoid estate planning. It’s an emotional challenge, preparing in a very real way to leave the world we enjoy with our loved ones. It’s not as much fun as going fly fishing or playing with the grandchildren.

Here are a few ways to include charitable giving in your estate plan, even when you aren’t having your estate plan created or reviewed.

Charitable beneficiaries. You can make a charity a partial beneficiary of a retirement account. They can be added as a primary beneficiary or as a contingent beneficiary. These changes can be made simply by contacting the custodian of the account and following their instructions for changing beneficiaries. Note that in certain states, spousal approval is required for any beneficiary changes. You can use this opportunity to also update your beneficiaries.

There’s a tax benefit in doing this. Charitable beneficiaries do not have to pay income tax on retirement distributions, although individuals do. Depending on the income level of an individual beneficiary, an heir could lose more than 40% of the inherited retirement account to state and local taxes.

The addition of a charitable beneficiary may restrict the ability for family members to stretch the receipt of retirement assets over time. Check with your estate planning attorney to make sure your good deed does not cause a hardship for family members.

Create a charitable IRA of your own. Another way to use retirement funds for a donation, is to roll some assets out of a main retirement account into a smaller retirement account with only charitable beneficiaries. Instead of consolidating accounts, you are doing the opposite, but for a good reason. This will allow you to manage the amount of money being left to the charity and take required or discretionary distributions from whichever account you choose.

Life insurance and annuities. Both of these vehicles use beneficiary designations, so the same strategy can be used for these accounts. Typically, the annuity must still be in the deferral state—not annuitized—and the life insurance contract must allow for changes to be made to the beneficiaries, which is true for most accounts. Note that life insurance proceeds are non-taxable to individuals and charities and annuity proceeds are generally partially tax-free to individual heirs (amount of basis in the contract).

Talk with your estate planning attorney about the optimal strategies for making charitable giving part of your estate plan. Your situation may differ and there may be other ways to maximize the wealth that is shared with charities and with your family.

Reference: Austin Business Journal (October 2, 2019) “Charitable conundrum: Why do we give up on giving at death?”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

How to Find Money in Forgotten Accounts – Annapolis and Towson Estate Planning

Many people who retire find it hard to live on a reduced income, so any windfall is a delight. From bank accounts to life insurance, utility company security deposits and retirement accounts, you might have anywhere from a few bucks to hundreds or thousands of dollars sitting around gathering dust. The trick is to know where to look, since you might not remember all the possible companies that still have some of your money.

Here are some tips for seniors on how to find money in forgotten accounts.

Where to Look for Old Bank or Investment Accounts

If you had money in a bank or brokerage account you did not use for several years, the bank probably sent the funds to the state of your last known address. Your last known address usually means the last address the bank had for you when you actively banked with them.

Let’s say you went to college out of state. You opened a checking account at a local bank for convenience while in school. After graduation, you forgot about the account. Eventually, the bank will send the remaining balance to that state or the state from the permanent address you gave when you opened the account.

You can try to track down obsolete accounts online. Go to unclaimed.org and check every state where you have lived. You will have to fill out and send in a form, either online or by mail, to request the funds. The website contains funds that other types of companies, like utilities, have also surrendered to the state.

This type of search can be time-consuming, but the rewards can make your efforts worthwhile. If you have ever gone by another name, be sure to check under all the names you have used. If you use a nickname, check under all possible combinations of last names, legal first name and nickname.

If you have a common name, you might have to sift through many possible accounts to find yours. You might also be surprised at how many other people have the same name as you.

Pensions and Retirement Accounts

You have several options to try to dig up an old employer-sponsored retirement account, including pensions. You need to find the current administrator of that employer’s plan. You might be able to find the contact information for the plan administrator on freeERISA.com or by calling the personnel office of that employer.

Sometimes a 401(k) plan gets terminated. In that situation, you can look for contact information on the Employee Benefits Security Administration’s website. Additional options include the Pension Benefit Guaranty Corporation, or the nonprofit Pension Rights Center.

How to Search for Life Insurance Policies

You can look for an old life insurance policy you owned or of a deceased relative by using the Life Insurance Policy Locator. Some life insurance policies show up on unclaimed.org, but for others, you might have to find the name of the insurance company at naic.org and then contact the insurer.

Scammer Alert

Some companies defrauded people by charging exorbitant fees to conduct searches for them, but do not deliver the promised service. If a company charges a fee upfront before they find your lost funds, that is a red flag the firm is fraudulent. If you want someone else to do the search for you, only agree to pay a percentage of the money recovered. The search firm’s cut should not exceed 10 to 20 percent of the recovered funds.

References: AARP. “How to Find “Forgotten” Cash.” (accessed October 2, 2019) https://www.aarp.org/money/budgeting-saving/info-2019/find-unclaimed-cash.html

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

What Do I Do With an Inherited IRA? – Annapolis and Towson Estate Planning

When a family member dies and you discover you’re the beneficiary of a retirement account, you’ll need to eventually make decisions about how to handle the money in the IRA that you will be inheriting.

Forbes’ recent article, “What You Need To Know About Inheriting An IRA,” says that being proactive and making informed decisions can help you reach your personal financial goals much more quickly and efficiently. However, the wrong choices may result in you forfeiting a big chunk of your inheritance to taxes and perhaps IRS penalties.

Assets transferred to a beneficiary aren’t required to go through probate. This includes retirement accounts like a 401(k), IRA, SEP-IRA and a Cash Balance Pension Plan. Here is some information on what you need to know, if you find yourself inheriting a beneficiary IRA.

Inheriting an IRA from a Spouse. The surviving spouse has three options when inheriting an IRA. You can simply withdraw the money, but you’ll pay significant taxes. The other options are more practical. You can remain as the beneficiary of the existing IRA or move the assets to a retirement account in your name. Most people just move the money into an IRA in their own name. If you’re planning on using the money now, leave it in a beneficiary IRA. You must comply with the same rules as children, siblings or other named beneficiaries, when making a withdrawal from the account. You can avoid the 10% penalty, but not taxation of withdrawals.

Inheriting an IRA from a Non-Spouse. You won’t be able to transfer this money into your own retirement account in your name alone. To keep the tax benefits of the account, you will need to create an Inherited IRA For Benefit of (FBO) your name. Then you can transfer assets from the original account to your beneficiary IRA. You won’t be able to make new contributions to an Inherited IRA. Regardless of your age, you’ll need to begin taking Required Minimum Distributions (RMDs) from the new account by December 31st of the year following the original owner’s death.

The Three Distribution Options for a Non-Spouse Inherited IRA. Inherited IRAs come with a few options for distributions. You can take a lump-sum distribution. You’ll owe taxes on the entire amount, but there won’t be a 10% penalty. Next, you can take distributions from an Inherited IRA with the five-year distribution method, which will help you avoid RMDs each year on your Inherited IRA. However, you’ll need to have removed all of the money from the Inherited IRA by the end of five years.

For most people, the most tax-efficient option is to set up minimum withdrawals based on your own life expectancy. If the original owner was older than you, your required withdrawals would be based on the IRS Single Life Expectancy Table for Inherited IRAs. Going with this option, lets you take a lump sum later or withdraw all the money over five years if you want to in the future. Most of us want to enjoy tax deferral within the inherited IRA for as long as permitted under IRS rules. Spouses who inherit IRAs also have an advantage when it comes to required minimum distributions on beneficiary IRAs: they can base the RMD on their own age or their deceased spouse’s age.

When an Inherited IRA has Multiple Beneficiaries. If this is the case, each person must create his or her own inherited IRA account. The RMDs will be unique for each new account based on that beneficiary’s age. The big exception is when the assets haven’t been separated by the December 31st deadline. In that case, the RMDs will be based on the oldest beneficiaries’ age and will be based on this until the funds are eventually distributed into each beneficiary’s own accounts.

Inherited Roth IRAs. A Roth IRA isn’t subject to required minimum distributions for the original account owner. When a surviving spouse inherits a ROTH IRA, he or she doesn’t have to take RMDs, assuming they retitle the account or transfer the funds into an existing Roth in their own name. However, the rules are not the same for non-spouse beneficiaries who inherit a Roth. They must take distributions from the Roth IRA they inherit using one of the three methods described above (a lump sum, The Five-Year Rule, or life expectancy). If the money has been in the Roth for at least five years, withdrawal from the inherited ROTH IRA will be tax-free. This is why inheriting money in a Roth is better than the same amount in an inherited Traditional IRA or 401(k).

Speak with an experienced estate planning attorney about an Inherited IRA. The rules can be confusing, and the penalties can be costly.

Reference: Forbes (September 19, 2019) “What You Need To Know About Inheriting An IRA”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys