Do you want to leave an IRA to your Children or Grandchildren?

Recently we have had several client inquiries asking, “Is leaving my IRA to my children or grandchildren a good idea?” The answer to the question is possibly. As so often is the case, it depends on the goals you are trying to accomplish, and of course, the taxes involved.

The tax rules for Inherited IRAs have been changing. If you inherited an IRA after 2019 you are now required to withdraw all the money in the IRA within 10 years of the date of the death of the account owner with a few exceptions. These include a surviving spouse, a child who has not reached majority, a chronically ill or disabled person, or a person not more than 10 years younger than the IRA account owner. Before the Secure Act passed in December 2019, most beneficiaries were permitted to stretch the required minimum distribution (RMD) over the beneficiary’s life expectancy.

10 Year Rule

The Secure Act rules state IRAs must now be distributed within a 10 year period. There is no longer an RMD or required annual amount that must be withdrawn. Now the account must be depleted by the end of the 10^th year following the owner’s death. The funds may be withdrawn equally over the 10 year period, or all withdrawn in year 10. If the funds are not depleted at the end of 10 years, they are subject to a 25% penalty tax on the amount that should have been withdrawn. Secure Act 2.0, passed December 29, 2022, lowered the excise tax for account owners who fail to take RMDs from 50% to 25% or, if the failure is corrected in a timely manner, 10%.

Children As an Exception to the 10-Year Rule

If you leave your IRA to a child who has not reached the age of majority (18 in Maryland), an exception is in place for the child until they reach age 18. Until the child reaches majority, they must make withdrawals based on their own life expectancy (using the RMD Tables). However, once the child is 18, they must follow the 10 year rule and disburse the entirety of the account by the last day of the 10^th year following their 18^th birthday.

Higher Education Exception

Another exception exists for your minor children if they are pursuing higher education in which case, they must continue using their lower RMD life expectancy tables until the age of 26. Beginning on their 26^th birthday they will have 10 years to withdraw all funds from the account.

No Exceptions for Grandchildren

Unfortunately, the tax laws did not provide a delay in the 10-year rule for grandchildren or other related or unrelated minors. The exception is in place only for the account owner’s minor children. This means if you leave your IRA or other qualified funds to your minor (or older) grandchildren, they will have to withdraw (and pay taxes on) all funds over 10 years.

Important Ownership Issues

Leaving your IRA to a minor requires a conservator or guardian to manage the account until the child reaches 18 (in Maryland). There is no avoiding this appointment because financial companies (custodians) are not permitted to deal with minors. A will is not a solution because a will is a probate document and IRAs do not pass by probate because they are exempt. A minor’s parent can make a request to be appointed guardian on the beneficiary form, which would be the simplest way to accomplish this requirement.

Bottom Line

When planning your estate, it is important to consider the type of assets you are transferring to a minor. For instance, if you transfer cash, securities, or tangible assets such as a car, house or other belongings, you should consider the tax impact and control issues until the child reaches majority.

At Medallion Financial Group, we believe financial planning is about Family. We have been helping families invest in the future since 1987 through a holistic planning approach. We recognize there are a variety of needs when it comes to retirement planning, plan rollovers, annuities, college planning, life insurance options, and investment management. It is easy to get lost in a sea of choices. Our financial advisors help with the basics and beyond to enable our clients to get the education, advice and management they need to retire with confidence.

Our focus is twofold: first and foremost, we are fiduciary advisors. We stand against any violation of laws, values, and ethics. Second, we treat our clients as part of our family, not only those who call Maryland and Georgia home, but clients across the US who have benefited from our reputation of personal service, integrity, and expertise.

We strive to exceed client’s expectations – because we have high expectations of ourselves.