By Allyn Hughes, CFP®, ChFC®, CLU®, CAP®
This article provides a short review of the steps that the next-of-kin or executor of the decedent will go through to manage the transition of an investment account after someone dies.
IRAs, Roths and other ERISA retirement accounts
When these accounts are opened, the account owner has the opportunity to name primary and contingent beneficiaries that would receive this money at the owner’s death. These beneficiaries could have been changed over time as well.
What becomes of the account depends on whether the beneficiary is the spouse or not and whether the original account owner had already begun taking required minimum distributions from the account annually after age 70.
Spouses may be able to rollover the IRA into their own IRA. Other beneficiaries can open new inherited IRA accounts to receive their share of the inheritance. Any beneficiary could choose to simply liquidate the account and withdraw all assets but in non-Roth accounts this would subject all of the withdrawal to ordinary income taxes.
Once the funds are in the Inherited IRA account, the account holder will then be able to transfer the account to a different custodian or broker of his/her choice if he/she wants to change custodians.
The new owner of the inherited IRA will eventually (in some cases immediately) have to begin making their own annual required minimum distributions. These withdrawals are based on the prior year-end account value and a life expectancy factor. Withdrawals from Traditional IRAs, 401ks and other pre-tax employer retirement plans are subject to income taxes. Withdrawals from Roth IRAs or after-tax amounts in employer retirement plans are received tax free.
In some cases, withdrawals could be postponed up to five years as long as the entire account balance was withdrawn within five years. This is generally less advantageous than spreading withdrawals over life expectancy and doing them each year.
The Executor of the estate will have many responsibilities including:
- Identify the terms of the will or trust to be followed,
- If the decedent didn’t have a trust, then work with the court to manage the probate process
- Determine the amount and type of assets in the estate
- Identify creditors and pay all bills of the estate, from assets of the estate,
- Prepare the final tax return(s) and pay all taxes due (income, property, state and federal estate tax if appropriate),
- Identify how and to whom the residual assets in the estate will be distributed. Assets could be distributed to individuals or organizations,
- Make a plan to distribute these assets after all other costs of the estate have been met and the estate is closed.
The process for managing the taxable investment accounts for a decedent also involves a few steps:
- Inform the account custodian of the death and send a copy of the death certificate to the custodian.
- Open an “Estate Account” that will hold the assets that were in the decedent’s individual account(s).
- Provide the custodian with a “Letter of Testamentary” which shows that you have been appointed as the executor of the decedent’s estate by a local judge.
- Confirm the domicile of the decedent to make sure that the rules of the correct state are being followed.
- Complete the forms which will allow the executor to distribute assets in taxable accounts (or a home or other personal property) to the people named in the will or trust.
For people who are new to these steps, they are burdensome. Estate planning attorneys, financial advisors and others can help executors through these steps to simplify this process.