By now, most of you are aware of the massive changes made by the SECURE Act to the IRA distribution rules. These new rules affect the beneficiaries of IRAs or other tax deferred retirement accounts whose owners die after December 31, 2019. Under the new rules, most non-spouse beneficiaries must completely liquidate an inherited IRA or other tax deferred retirement account by the end of the 10th year following the year of the account owner’s death.
The new rules do not mandate periodic distributions for those subject to the 10 year rule, merely a complete liquidation by the deadline. Many IRA beneficiaries will likely incur substantially larger tax bills due to the bunching of IRA distributions into this compressed time frame. However, a beneficiary may avoid those anticipated tax liabilities by disclaiming her rights in the inherited IRA.
A disclaimer is the refusal to take possession, or enjoy the benefit of an IRA belonging to a deceased person. It’s a legal “no thank you.” A beneficiary may disclaim all or a part of the IRA.
Done correctly, a disclaimer permits an IRA beneficiary to avoid all income tax liability otherwise due on the receipt of the account. To be eligible to disclaim, the beneficiary must not have benefitted in any manner from the IRA.
Further, the disclaimer must be in writing, irrevocable and unqualified, and delivered to the person possessing or having custody of the asset no later than the date which is 9 months after the date of the account owner’s death. If those conditions are met, the taxpayer avoids all tax liability due and payable with respect to the inherited IRA.
Note that there are other reasons besides taxes that a beneficiary may desire to disclaim an IRA inheritance. The beneficiary may not need the money and the IRA may be more useful to a co-beneficiary or a contingent beneficiary. Alternatively, the IRA beneficiary may have debt issues and desires to protect the account from his creditors by disclaiming it to another.
The disclaimer is a powerful tool available to IRA beneficiaries for post-death planning that shouldn’t be overlooked. A disclaimer lets the beneficiaries control where an IRA will go after the death of the owner to best meet the beneficiary’s own goals and objectives.
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