In the wake of the death of a parent, it is common for siblings to inherit assets from their deceased parents. These assets can include anything from cars to houses, bank accounts, jewelry, or IRA accounts. Understanding the process of what to do next after you inherit assets will be crucial. Often, you can inherit assets in a joint format with your siblings, as your parents may have wanted you to each have equal parts in the inheritance. When things are inherited jointly, it can make it even more tricky to understand the legalities.
One asset in particular that can be challenging to understand is inherited IRA accounts. This is because the specific rules regarding how to handle inherited IRAs can feel complicated and confusing to comprehend. Trust and Will, a leader in online Estate Planning services, knows how easily confusing this can be. That is why we have put together this article to better explain each of the different rules that you will need to understand should you inherit an IRA account, and how to divide it among your siblings. Keep reading below to learn more about the intricacies of splitting and inheritance between siblings!
What is an IRA account?
Before we explain tips on how to split an inherited IRA account, it will be important to understand what an IRA is. An IRA is an individual retirement account that allows you to save money for your retirement throughout the course of your life. These accounts also have an age requirement that specifies when you can begin withdrawing money from the account without a penalty, which is 59 ½ years old. Any money taken out before this date will be subject to a 10% penalty. However, at the age of 72, (previously 70 ½ years old), the account holder will be required by the IRS to begin withdrawing a certain percentage from the account annually. IRA withdrawals must begin no later than April 1 of the following year. This is referred to as the required minimum distribution (RMD). The IRA distribution amount changes each year and is based on the year-end account value and the owner’s life expectancy.
Rules for Splitting IRAs
Under the SECURE Act*, individuals who are disabled, minor children, chronically ill, not over 10 years younger than the deceased, or a spouse will be able to disregard the requirements on what year the individual died and instead follow the more preferred inherited IRA rules that apply to individuals who passed away before 2019. For those who passed away in 2019 or earlier, the RMD was calculated based on the life expectancy of the account holder. Thus, the balance in the IRA account will be divided by the remaining years you are expected to live based upon when you inherited the account.
However, as you and your siblings will be multiple beneficiaries, there are a few stipulations you will want to be made aware of. When there are multiple beneficiaries, the person who is the oldest will be used to determine the minimum required distribution amount. Thus, it will be determined by the age of the oldest sibling.
There is one alternative for those who have become joint beneficiaries of an IRA account. You can split the IRA between the two of you into separated inherited IRAs. This must be done within a year of the deceased passing away. When you do this, you and your siblings will each be able to have your own separate inherited IRA, allowing you each to use your own life expectancies to determine what your minimum required distributions will be.
It will be important for you and your siblings to sit down and discuss together what the best option will be for you all collectively. You will also want to ensure that you are all aligned and understand what the path going forward will be for splitting up the inherited IRA so as to not create any confusion or anger.
The Importance of Estate Planning
Understanding the many evolving rules and regulations associated with inherited IRA accounts can be confusing and complex. However, to make things easier for beneficiaries, it will be important to create a comprehensive Estate Plan which will allow you to ensure your beneficiaries are listed properly and that your hard-earned assets are protected.
Creating an Estate Plan is easier than ever before with Trust and Will’s affordable and easy-to-navigate online Estate Planning services. With Trust and Will, you can now create your Will, Trust-Based Estate Plan, and Nomination of Guardianship documents all from your home. Not sure where to start? Take our free online quiz to get pointed in the right direction. So, what are you waiting for? Don’t put off safeguarding your Estate from unnecessary legal fees and court wranglings after you pass. Get started by creating your state-specific Estate Plan online!
*The SECURE Act changed several parts of the annual RMD requirements, but it did not affect the rule that requires the beneficiaries to take the year-of-death RMD. If the beneficiary is one of the several beneficiaries now subject to the 10-year rule under the SECURE Act, that payout period would apply after the year-of-death RMD is satisfied.