Legal Blog

The Weekly Scenario: IRAs & Based Adjustments

Question: Do IRA’s receive a so-called based adjustment at the owner’s death?

Answer: No, after an IRA owner dies, if he or she had tax basis, his beneficiary inherits that basis (not a basis adjustment based on a new fair market value), which is distributed tax free using the so-called ‘pro-rata’ tax rule. During an individual’s lifetime, after-tax funds can generally be added to an IRA in one of two ways; either via nondeductible IRA contributions or via rollovers of after-tax retirement funds that were previously held in an employer plan, such as a 401(k) or 403(b). Once accumulated inside an IRA, after-tax funds, for the most part, can generally only be withdrawn under the “pro-rata” rule, where each dollar withdrawn is partially taxable and partially tax free based on the percentage of after-tax money in the account. (incidentally, the pro-rata calculation is done on IRS Form 8606 and the pro-rata rule applies separately to owned IRA accounts and inherited IRA accounts). If the beneficiary has her own (self-funded) IRAs for instance, they are not factored into the pro-rata calculation for the inherited IRA. I find that some advisors don’t know to ask whether the deceased IRA owner ever made any nondeductible IRA contributions or rolled over after-tax plan funds to an IRA. This question can be investigated by looking for Form 8606 attached to one of the decedent’s returns. To claim the tax-free portion of distributions from an inherited IRA, a beneficiary will also have to file Form 8606, just as the IRA owner did. If you have any questions or would like more information please contact Steve Shane at: sshane@offitkurman.com | 301.575.0313.

ABOUT STEVE SHANE

Steve Shane Head Shot for webSteve Shane provides strategic counseling to clients in need of estate administration, charitable giving and business continuity planning while minimizing estate, gift, and generation-skipping transfer tax exposure. He offers legal guidance to clients on asset protection and the proper disposition of assets in accordance with the client’s objectives, while employing tax planning techniques such as the use of irrevocable trusts, life insurance planning, lifetime gifts and charitable trust. He is also experienced with drafting documents for business planning, the incorporation and application for exemption for Private Foundations and the administration of decedents’ estates. You can also connect with Offit Kurman via FacebookTwitterGoogle+YouTube, and LinkedIn. WASHINGTON | BALTIMORE | FREDERICK | PHILADELPHIA | WILMINGTON | VIRGINIA