When a parent or relative passes away, you may find yourself inheriting part or all of an estate that may include retirement accounts and real estate. Being remembered in a loved one’s will can provide comfort while dealing with the loss; however, you are still faced with the challenges of what to do with Mom’s retirement account or Aunt Erma’s home, several states away.
If you are the sole heir, you can do what you want with the property, choosing to live in it, keep it as a vacation or income property, or sell it. Renting the home requires work as a landlord that you may not be able to take on, especially if you are dealing with the emotional loss of a relative. Keeping a property as a vacation home doubles your property costs, and may take away from the financial plan you have in place. We often suggest selling the property, even in the current depressed housing market. In reality, the home is worth what it is worth in the current market. Upkeep and related expenses can deplete an estate. It could take several months to find a buyer willing to pay the “sentimental value” you have placed on the home; therefore we suggest having the home appraised. This can help you manage your expectations and avoid any questions from the IRS concerning the valuation.
If the property is to be divided among others, there are a few issues you will want to avoid. First, do not let anyone move into the house. This creates maintenance, tax, and insurance liability for all until one party owns the home. If someone wants the home for sentimental value, we suggest selling them your share. If there is too much bickering among the parties involved, we believe it is still best to sell it and divide the proceeds. You can allow the party that wants the property to have a right of first refusal.
If you are a beneficiary of a traditional individual retirement account (IRA) or employer-sponsored retirement plan, take the time to contact a lawyer, tax accountant or financial planner before doing anything with the account. Unlike many other inherited assets, IRAs or 401(k)s typically pass directly to the beneficiary without having to go through probate.
If you are inheriting a retirement account from a spouse, you can roll the accounts over to your own new or existing traditional or Roth IRA, transfer inherited assets into an inherited IRA or disclaim the assets within nine months of your spouse’s death so that the account passes on to the next eligible beneficiary.
If the account is from a nonspouse, the tempting option is to take a lump sum distribution, but this will put you at a tax disadvantage. You can also disclaim the inheritance, allowing it to pass to secondary beneficiaries or a charity. Generally, your best option is to transfer or roll over inherited assets to an Inherited IRA and begin taking required minimum distributions (RMD) by December 31 of the year following the account owner’s death. Since minimum distributions are calculated on your life expectancy, distributions can be relatively low, if you are young. This will allow the account to continue to grow tax deferred. Since taxes will be due as distributions are taken, you should end up paying less in taxes over the life of the account.
If the deceased account owner was older than 70½, you must generally withdraw the required amount by December 31 of the year the IRA owner died, if the account owner had not already taken a distribution for the year. The RMD amount distributed to you as beneficiary must be based on the IRA owner’s RMD schedule. As for subsequent distributions, you can continue take them based on your Single Life Expectancy factor determined by the IRS. You also have the option to choose a five-year plan, where you are not required to withdraw annually, but you must withdraw all assets within five years.
At Henssler Financial, we believe you should Live Ready. If you know you are an executor of an estate or discover you are a named beneficiary, consult the attorney or tax adviser that designed the estate. Additionally, we believe you should prepare your own estate by having a will in place and making sure your beneficiary designations reflect your current wishes. For more information regarding inheritances, please contact Henssler Financial at 770-429-9166 or experts@henssler.com.