Legal Blog

The Weekly Scenario: IRA Special Rules for Spouses

Question: What options will my spouse, who is named as beneficiary on my IRA, have once she receives the account after my death?

Answer: All the IRA special rules for spouses, including spousal rollovers, are only available when the spouse is named (as beneficiary) on the beneficiary designation form.  A spouse who inherits through an estate or trust is not automatically entitled to these benefits. With a spousal rollover, the funds in the surviving spouse’s IRA are treated as if they were always in the surviving spouse’s IRA.  Accordingly, the spouse is no longer treated as a beneficiary and for many spouse beneficiaries, the spousal rollover will be an appropriate strategy as it allows the spouse to combine accounts and receive smaller required minimum distributions (“RMDs”).

When a surviving spouse chooses to keep an inherited IRA (not opt for the rollover), she is not subject to RMDs until the later of December 31 of the year following the year of the original account owner’s death or December 31 of the year her deceased spouse would have been 70½. This allows the spouse beneficiary of an IRA owner who died young to delay RMDs potentially for many years.

Moreover, distributions from inherited IRAs are never subject to the 10% early distribution penalty. So in the circumstance in which the spouse beneficiary is under age 59½ and wants to access her IRA funds (without penalty), choosing an inherited IRA makes that possible.

If, on the other hand, a younger spouse beneficiary elects to do a spousal rollover, the account is no longer an inherited IRA.  Distributions taken before age 59½ will now be subject to the 10% early distribution penalty.

Comment: One other interesting point to note.  Once a spousal rollover is elected, there is no going back (so to speak). However, the decision to go with an inherited IRA is reversible! Therefore, a spouse may want to keep the funds in an inherited IRA when she is under age 59½ and then do a spousal rollover later when the early distribution penalty is no longer an issue.

Example: After Husband’s death in 2002, Wife elected to do an inherited IRA.  Wife will not be required to take RMDs until the year Husband would have been 70½ (2012).  In 2007, Wife is over age 59½ and decides it is time to do a spousal rollover. By doing so, she can delay future RMDs until she reaches the year she turns age 70½ (2017).

 

 

As always, if you have any questions or would like to learn more, please contact Steve Shane at sshane@offitkurman.com or 301.575.0313.

ABOUT STEVE SHANE

Steve Shane Casual Smallsshane@offitkurman.com | 301.575.0313

Steve 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.

 

 

 

ABOUT OFFIT KURMAN

Offit Kurman is one of the fastest-growing full-service law firms in the United States. With over 200 attorneys in 14 offices that stretch from New York to North Carolina, we represent privately-held companies and families of wealth throughout their business life cycles. Our mission is to provide our clients with “The Better Way” to grow their organizations, protect their businesses’ and families’ wealth, and resolve their most challenging legal conflicts. In addition to our quality of attorneys and breadth of legal services, Offit Kurman is distinguished by our unique operational structure, which encourages collaboration rather than internal competition. The same approach that makes our firm attractive to legal practitioners gives clients unlimited access to experienced counsel in every area of the law. Trust, Knowledge, Confidence—in a partner, that’s perfect.

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