Turn down an inherited IRA? That may seem implausible, but for some financially sound heirs, “disclaiming” their right to an inherited IRA could be a smart strategy for their families.
By disclaiming, an heir waives the right to assets left to him. “It’s the legal equivalent of playing dead,” says Jeffrey Levine, IRA technical consultant for Ed Slott and Co., which provides IRA advice. When a person takes this action, the disclaimed portion of the inheritance is passed on automatically to either a designated co-beneficiary or a secondary beneficiary.
Say your mother named you as the heir of a $4 million brokerage account and the primary beneficiary of a $2 million IRA. She dies, and you disclaim the IRA, which passes to your son, who is the secondary beneficiary. Your mother’s estate owes estate tax on the amount that exceeds the $5.43 million federal estate-tax threshold in 2015, but the IRA will not be part of your taxable estate when you die.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
When the federal thresholds were lower, disclaiming was often used to reduce a younger generation’s estate-tax burden. But even if your estate is far below today’s high threshold, the strategy still has a place in estate planning, experts say.
Often, disclaiming can reduce the family’s overall income-tax burden, for instance. Say you’re in the 35% tax bracket and you inherit an IRA. You’ll need to take required minimum distributions annually at your tax rate. But if you disclaim and your daughter, who pays a 15% rate, inherits the IRA instead, the tax bite will be lower. Not only will she pay taxes at a lower rate, but her annual RMDs will be smaller, with the account growing tax-deferred over her longer life expectancy.
In some cases, disclaiming is an act of generosity. A person could disclaim an IRA with the money going to charity if the charity is a contingent beneficiary, and the money would shift free of taxes. Or a wealthy sibling could disclaim his share of an inherited IRA so his two siblings, who are less well-off, would split the IRA.
Disclaiming also has “been used to fix IRA designations,” says David Handler, an estate-planning lawyer at Kirkland & Ellis, in Chicago. Say the late husband designated his estate as the IRA’s beneficiary but his will says the IRA should go to his wife. The executor could disclaim the IRA. With no other designated beneficiaries, the IRA’s default provisions kick in. If those say that the next beneficiary in line is the surviving spouse, the wife would then inherit the account.
Whatever the reason, the decision to disclaim an IRA is irrevocable. However, in some cases, a surviving spouse could be able to use some of the money even after she disclaims it. Joe Franklin, president of Franklin Wealth Management, in Hixson, Tenn., offers this example: A surviving spouse disclaims to a trust set up for the children. “The trust would be for the benefit of the spouse while still living, and then go to the kids,” he says.
The Rules for Saying No Thanks
Before disclaiming the IRA, “make sure the people you want to get it will get it,” says Denise Appleby, of Appleby Retirement Consulting, in Grayson, Ga. You cannot direct who will get the IRA. Check to see if there are other primary beneficiaries or contingent beneficiaries named. If you are a primary beneficiary and disclaim, those other named beneficiaries are next in line.
If you think you might disclaim the IRA, “you don’t want to take possession of it,” says Appleby. Do not withdraw any money or change investments. If you do, you lose the right to disclaim. The only exception: If the late owner didn’t take a required minimum distribution in the year he died, you can withdraw that money, Appleby says.
You must disclaim within nine months after the owner died. And you can choose to disclaim just a part of the IRA. Disclaiming must be done in writing. Ask the IRA custodian if it has a form for you to use. Appleby says it can be wise to consult an estate-planning lawyer; in some cases, you may need to file the disclaimer with the local court.
-
What to Expect From Bitcoin and Other Cryptocurrencies in 2025With help from Donald Trump, the cryptocurrency industry is expanding rapidly. Here's what to expect from bitcoin in 2025.
-
What's the Key to a Happy Retirement for a Couple?Retired couples spend lots of time together. Without the distractions of work and raising kids, miscommunication can cause trouble. Here's a way to avoid that.
-
457 Plan Contribution Limits for 2025Retirement plans There are higher 457 plan contribution limits for state and local government workers in 2025 than in 2024.
-
Medicare Basics: 11 Things You Need to KnowMedicare There's Medicare Part A, Part B, Part D, Medigap plans, Medicare Advantage plans and so on. We sort out the confusion about signing up for Medicare — and much more.
-
The Seven Worst Assets to Leave Your Kids or Grandkidsinheritance Leaving these assets to your loved ones may be more trouble than it’s worth. Here's how to avoid adding to their grief after you're gone.
-
SEP IRA Contribution Limits for 2024 and 2025SEP IRA A good option for small business owners, SEP IRAs allow individual annual contributions of as much as $69,000 in 2024 and $70,000 in 2025..
-
Roth IRA Contribution Limits for 2024 and 2025Roth IRAs Roth IRA contribution limits have gone up. Here's what you need to know.
-
SIMPLE IRA Contribution Limits for 2024 and 2025simple IRA The SIMPLE IRA contribution limit increased by $500 for 2025. Workers at small businesses can contribute up to $16,500 or $20,000 if 50 or over and $21,750 if 60-63.
-
457 Contribution Limits for 2024
retirement plans State and local government workers can contribute more to their 457 plans in 2024 than in 2023.
-
Roth 401(k) Contribution Limits for 2025retirement plans The Roth 401(k) contribution limit for 2024 is increasing, and workers who are 50 and older can save even more.
