Are Inherited IRAs Protected From Potential Creditors?
First of all, we need to define what an inherited IRA is. The terminology “Inherited IRA” means this. I have an IRA during my lifetime; I died before I have withdrawn everything from my IRA. I have my children designated as the beneficiaries of my IRA. When I die, my children then take over my IRA account. For them, it becomes an inherited IRA that they inherited from me. And the question about creditors relates to this. During my lifetime, my IRA has special creditor protection. As long as the assets are inside of my IRA, they are not subjected to my creditors, even if I declare bankruptcy.
The Supreme Court ruled in the last two years that when I pass my IRA onto my children, that absent contrary state law, my children do not get the protection in that inherited IRA anymore, and it is subject to creditors. I happened to be located in Missouri, and for our clients who are in Missouri, their children are located in Missouri, Missouri is one of, I believe, only five states that have passed legislation that does exempt inherited IRAs from creditors.
What Are The Main Taxes Encountered In Dealing With Inheritance Issues?
There are three primary taxes in dealing with inheritance issues. The first is the federal estate tax. If a person is subject to federal estate tax, the general rule is that it is due nine months after the date of death. In most states, since 2013, federal estate tax is not an issue because in 2013, congress increased the exemption from estate taxes from $1 million to $5 million index for inflation. Unless a person dies with more than $5 million, or a married couple with more than $10 million subject to estate tax, there is no estate tax. The second type of tax that happens at death when dealing with inheritance is the state estate tax.
Some states, like Missouri, do not have a state estate tax, but other states have a state estate tax with a much lower exemption than the federal exemption. For example, if you live in a state like Minnesota, any estate over $1 million, even if it is not subject to federal estate tax, is subject to state estate tax. The third type of tax encountered when dealing with inheritance is for retirement plan accounts. When IRAs or 401(k) s are inherited by a beneficiary, the beneficiary has to pay the income taxes on that retirement plan account.
Are There Any Tax Exemptions In Transferring A Family Business?
There are no real tax exemptions when transferring a family business. In the 1990s, congress enacted legislation that did allow tax exemptions when transferring family businesses, but those provisions were repealed I believe, two, three, or four years ago. In effect, there are no real exemptions that are applicable to family business that other assets do not have.
What is Generation Skipping Transfer Tax?
The Generation Skipping Transfer Tax is a type of tax that is imposed to prevent skipping estate tax. What happened back at the beginning of the last century, many very wealthy families, and I am talking about families like the Rockefellers and the Carnegies, figured out that for every generation, the same assets were subject to estate tax. When the senior generation died, the tax was imposed on those assets. They passed them down to the next generation, and when the next generation dies, the estate tax was again imposed on the same assets, and so on and so on. What they figured out is our children are already going to have enough money.
We do not have to leave it to them; we are going to leave it to our grandchildren. Or if we have great grandchildren, we will just leave it to the great grandchildren, and can skip the estate tax on those assets for one or two of our generations. Congress finally wised up to this in the 1960s, and they passed the law which says that it is okay for you to skip a generation for estate tax, but if you skip a generation for estate tax, we are then going to impose on that generation something called the Generation Skipping Transfer Tax, which happens to be imposed at exactly the same way the estate tax does. In effect, the generation skipping transfer tax is a tax designed to make sure that a death tax is imposed on assets at the passing of each succeeding generation.
Helpful Tips For Minimizing Taxes On Inheritance
The best tip I have for someone to minimize tax on inheritances, is to retain an experienced estate planning tax attorney. The estate tax or the death tax is the only voluntary tax in America that you only pay it if you want to. The reason is that there are so many planning techniques that the internal revenue code allows you to avoid estate tax. Probably the best known most recent example was Jackie Kennedy Onassis. When she died, there was zero estate tax imposed on her estate. She did that using a complicated system of charitable trusts that would not be applicable for the rank and file.
For many people, you can avoid estate tax altogether, but the things you would have to do in order to avoid estate tax would not be things that you would want complicating your financial life while you are still alive. But retaining a good estate planning attorney who has the education and the experience in doing tax planning, the best tip for anyone is that is the best way to get advice on what to do for you that will satisfy your objectives and minimize taxes for your family.
Additional Information Regarding Inheritance In Missouri
In this day and age, many parents I talk to are concerned about protecting their children’s inheritances. A generation ago, society was much different. The only time parents would think that they should not leave their inheritances outright to their adult children, would be when their adult children were financially responsible and somebody else was needed to manage it. In this day and age, we live in the most litigious society that we ever have, people are suing people for almost any reason, more than fifty percent of the marriages that are entered into this year will not last the duration until that couple is gone.
For that reason, many of our clients want to do planning using trusts that contain protection so that the monies are available for their children and their grandchildren. But if there is a lawsuit, a beneficiary who has financial difficulties or there is a divorce, those assets are not subject to being lost to a creditor or a soon to be ex-spouse.
For more information on Inherited IRAs And Potential Creditors, a free initial consultation is your next best step. Get the information and legal answers you are seeking by calling (314) 542-2210 today.
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