The $68 Trillion “Great Wealth Transfer”

The biggest generational wealth transfer ever is about to occur as the baby boomers pass $68 trillion in assets to their children.  According to an article written by David Robinson Here’s how to prepare your heirs for the $68 trillion “great wealth transfer,” Cerulli Associates projects that nearly 45 million U.S. households will transfer a total of $68.4 trillion in wealth to heirs and charity over the course of the next 25 years.  Much of this wealth is currently invested and held in individual retirement accounts (IRAs).

It is very important to understand the rules surrounding the transfer of IRAs in order to minimize the tax cost of such transfers and so that the assets can continue growing tax-deferred.  To avoid errors in handing inherited IRAs it is important to contact a qualified tax professional.

The titling of inherited IRAs is very important.  These accounts must contain precise wording indicating they are inherited accounts.

Another common mistake with inherited IRAs is overlooking the required minimum distribution.  Owners are required to take out an RMD starting when they are 70 1/2.  Heirs of IRAs must also take out RMDs.  Therefore, if the owner did not receive an RMD prior to death, the heirs will need to be sure they take out the RMD required for that year before transferring the account.

Failing to divide inherited IRAs into multiple accounts for the heirs can be a costly mistake particularly if there is a large age difference between beneficiaries.  When an IRA is not divided into separate accounts for each heir, the age of the oldest heir is used to determine the amounts of the RMDs for each heir.  Therefore, a younger heir could end up taking more out sooner than they would have needed to than if the account had been split into multiple accounts.  Taking more out sooner also results in more tax incurred earlier.

For Roth IRA accounts, it is important to note that there is no minimum withdrawals required for IRA owners.  However, the heirs of Roth IRAs are required to take RMDs, but these RMDs are tax free.  The income tax treatment of a Roth IRA following death is the same as before death with three exceptions.  The first exception is the 10% penalty for early distribution does not apply to post-death distributions.  The second exception is that if the five year holding requirement has been met, a beneficiary can withdraw earnings tax-free, even if the beneficiary is under 59 ½  . The last exception is that a beneficiary may be required to take distributions either by December 31^st of the fifth year following the year of the owner’s death or take the distribution over the beneficiary’s life.

Additionally, the tax law prohibits non-spouse beneficiaries from contributing to an inherited IRA.  The key to dealing with inherited IRAs is to not touch the accounts until you have talked with your CPA or trusted financial advisor to fully understand the accounts and the potential tax consequences associated with the accounts.

In a later blog, we will address some of the basic rules applicable to inheriting assets other than retirement accounts.  To schedule a conversation, contact us through our website (pricecpas.com) or at 615-385-0686.