When Non Spouses Inherit IRAs

Non-Spousal IRA Inheritances

If you inherit an IRA from someone other than a spouse, you cannot treat it as just any other IRA. It’s a totally different animal.

A spouse who inherits an IRA is the only person who can commingle funds with other IRAs. Everyone else must keep inherited IRAs totally separate and may not make new contributions to these accounts.

So, if you think you might inherit an IRA from someone other than your spouse, such as an elderly parent, it’s wise to do some advance planning if you can.  Your options for handling the account are a little trickier. In particular, there are some thorny rules regarding designating beneficiaries for IRAs.

In most cases, beneficiaries should be actual, named people — known as designated beneficiaries — rather than simply “my estate” or “my living trust.” Another no-no: leaving blank the space on the IRA beneficiary form (available from the financial institution that holds the account) in the mistaken assumption that the account automatically will be distributed to heirs as part of their will.

Why? Trusts, estates and other entities don’t have life expectancies. If they ‘receive’ an inherited IRA, they must draw down,and pay taxes on, the entire IRA account within five years or according to distribution plan of the original owner, if the owner had already begun taking distributions before his or her death.

On the other hand, if you directly inherit the account as a designated beneficiary, you have more choices on how to handle withdrawals. You can even stretch out distributions over your own life expectancy. That’s where we get the term ‘stretch IRA.'” Stretch IRAs are also known as “legacy,” “super” and “multigenerational” IRAs.

If you are one of several beneficiaries of an inherited IRA (say you’re sharing it with three siblings), separate the account as soon as possible. Each of you then can choose how to handle your own account.

A non-spouse who inherits an IRA generally has three choices:

Remain a beneficiary. In this case, you’ll transfer the IRA assets into a beneficiary distribution account, also called a beneficial IRA, described earlier. It remains an IRA, with both your name on the account as beneficiary and the deceased person’s name as the original account holder. Example: “John Smith IRA (deceased April 12, 2004) F/B/O (for the benefit of) Elizabeth Smith, beneficiary.

Make certain the financial institution does not put the IRA directly into your name. Doing so would make the inherited IRA fully taxable in one year.

As the beneficiary of an inherited IRA, you will forevermore need to make at least the annual required minimum distributions from the inherited IRA, regardless of your age. The age 70 1/2 guideline for beginning withdrawals no longer applies to this inherited account. You’ll need to make withdrawals every year — withdrawing the entire amount either within five years or “stretching” it over your life expectancy.

Non-spouse beneficiaries usually also can move an inherited IRA, via a direct trustee-to-trustee transfer, to another financial institution. In addition, you can change the way the money is invested. For instance, if your dad invested his IRA money in bond funds, you aren’t stuck with his choices. You can opt to reinvest the money in growth mutual funds.

Cash out the account so it is no longer an IRA. If you cash out the account, keep in mind that the funds are immediately considered taxable income for that year. Talk with a tax pro before you make this decision, especially if a significant amount of money is involved.

Give it away. If you’re doing well financially, you might choose to give your inherited IRA to someone else so the account can grow tax-deferred over a lifetime. This option should be discussed with the original IRA account holder while still living.  You may also need to seek legal advice.

One way to handle this situation would be to have the original account holder — your mother, for instance — designate your son as her IRA beneficiary to begin with. Another option would be for your mom to list you as the primary beneficiary and your young son as the contingent, or secondary, beneficiary.

In the latter case, you could then choose to disclaim, or give up control of, the IRA while the estate is being settled. The account would then pass to your son, the contingent beneficiary.

A “disclaimer,” also known as a “renunciation form” in legalese, is a written statement of the primary beneficiary’s desire to give up the inherited IRA. In most cases, a disclaimer must be filed with the court within nine months of the original account holder’s death or by Sept. 30 of the year following the account holder’s death, whichever is earlier.

However, the key to this entire giveaway is that your son must be listed on the deceased mom’s original IRA contract as the approved contingent beneficiary. You cannot simply give the tax-deferred account to him on your own, after your mother’s death.

If a parent wants to leave an IRA to several designated beneficiaries, he or she can take action while still living to separate the account. For instance, if a father has three children, he can divide his IRA into three separate IRAs and designate each child as the beneficiary of one of the accounts. This move can simplify things once the father dies and the estate is distributed.

The taxman is watching
A particularly important factor to consider after inheriting an IRA is whether the original account owner had begun taking annual withdrawals from the account. Why? If you don’t know whether withdrawals have begun, you could give the IRS an opportunity to step in and take a significant portion of the account in taxes and penalties.

If the account owner was 70 1/2 or older when he died, he should already have begun taking annual distributions.  If not, the IRS can assess a 50 percent penalty on the amount that should already have been taken out. The estate must handle these penalties and any owed taxes before beneficiaries — you — receive any money.

Also, if you simply sit on an IRA after inheriting it and fail to continue taking distributions, you’ll end up with a big tax and penalty bill later. The amount you, as the designated beneficiary, are required to withdraw from an inherited IRA can vary.  You shouldn’t count on the financial institution that handles your IRA to be familiar with inheritance rules. A tax professional is a wiser choice for guiding you through these muddy waters.

The Roth IRA difference
Unlike traditional IRAs, the Roth is not subject to distribution rules, so the account holder is not required to start distributions at 70 1/2. And upon the account holder’s death, a spouse can keep the Roth IRA intact, roll the proceeds into a new or existing IRA account and may continue to contribute to the account. There would be no requirement to take distributions.

A non-spousal beneficiary, on the other hand, must take distributions either by the end of the year marking the fifth anniversary of the account holder’s death or over the life expectancy of the beneficiary, starting no later than Dec. 31 of the year following the year the account holder died. No matter how the beneficiary decides to take the Roth IRA distributions, none would be subject to the 10 percent early withdrawal penalty.

The tax consequences of these choices should be considered on an individual basis and only after consulting with a tax expert.

Don’t miss the deadline

A final caveat: Don’t wait too long before deciding how to handle your inherited traditional IRA.

You have a little time on your side; the designated beneficiary of an inherited IRA doesn’t need to begin taking distributions from the account until Dec. 31 of the year following the IRA account holder’s death. However, keep in mind that just as the IRS doesn’t accept ignorance of tax laws as a reason for breaking them, it also doesn’t accept grief as an excuse. 

For more information, refer to IRS Publication 590, Individual Retirement Arrangements, or Montana State University’s publication: “Inheriting an IRA: Planning Techniques for Primary Beneficiaries.” Many financial institutions also have information available on inheriting IRAs. An informative book on IRAs, with a full section on “stretch IRAs” is “The Retirement Savings Time Bomb .. and How to Defuse It” by Ed Slott.

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Doing Business On the Phone While Driving

Every month more and more cities and states prohibit the use of cell phones while driving, exposing drivers to penalties such as fines.

Did you know that in addition to breaking the law, using a cell phone doing your work while driving may also expose you and your company to a lawsuit if you are involved in a car accident?

Employees Doing Business on Cell Phones

An employer could possibly be legally responsible for a car accident caused by an employee if the employee was on a work-related call at the time of the accident. In such an accident, the injured person is more likely to sue the employer, rather than the employee-driver, because the employer typically has more money — “deeper pockets,” as lawyers say — to pay a settlement or lawsuit judgment. This is why growing numbers of employers prohibit employees from making or taking work-related calls while driving.

If your employees use cell phones — whether their own phones or phones issued by the company — for work, you should have a policy prohibiting them from doing so while driving. Even if your state doesn’t restrict cell phone use by drivers, studies have repeatedly shown that using a cell phone while driving is dangerous. And, if an employee causes an accident while doing business on a cell phone, your company could be held liable for damages.

What Your Company Policy Should Include

Your policy on employee use of cell phones should:

  • prohibit employees from using cell phones while driving
  • tell employees what to do if they receive a call while driving (for example, ask the caller to wait until the employee can pull over or tell the caller that the employee will call back), and
  • address hands-free technology. For example, if your company will allow employees to use hands-free technology while driving, you should issue them hands-free equipment.
  • You should also explain that safety remains a concern: Employees should keep all calls while driving brief, and should end any call that distracts them from the road.

Below is a Sample Policy that a business can post to bind employees to a code of behavior regarding their cell phone usage while driving during work hours. You can expand the policy language to include additional scenarios relevant to your company’s situation, such as volunteers, drivers transporting people on behalf of your business, driving on company property, etc.

Although you may choose to edit the enforcement and disciplinary terms, the inclusion of specific terms strengthens compliance with a policy. If this policy is in effect, and your employees are warned in advance, those actions may very well help immunize your company from a successful lawsuit as a result of an auto accident involving the use of a cell phone.

The _____________ Company Cell Phone Policy While Driving During Work

We deeply value the safety and well-being of all employees. Due to the increasing number of accidents resulting from the use of cell phones while driving, we are instituting a new policy.

Employees are not permitted to use a cell phone (both company and a privately owned) either handheld or hands- free, while operating a motor vehicle on company business and/or on operating a motor vehicle on company time.

Employees are not permitted to read or respond to e-mails or text messages while operating a motor vehicle on company business and/or while operating a vehicle on company time.

This policy also applies to use of PDAs.

While driving, calls cannot be answered and must be directed to voice mail.

If an employee must make an emergency call (911), the vehicle should first be parked in a safe location.

Employees will be given two warnings. The third time an employee is found to be in violation of this policy, it is grounds for immediate dismissal.

Your signature below certifies your agreement to comply with this policy.

 ________________________________ Employee Signature

 _________________ Signature Date

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Client Advertising Through a Lawyer’s Eyes

Advertising is the business of preparing a public notice in order to give public attention about an organization, product, service, or idea (hereinafter “product”) from a known source in order to sell the product or convince the intended audience of the value of the product.

Everyone agrees that traditional forms of advertising includes sales pitches in newspapers, magazines, TV, radio and internet promotions. Advertising can also include messages sales receipts.

Obviously, advertising can take many forms – publicity, public relations, product placements, sponsorships, underwriting, and sales promotions. Advertising be found wherever a person’s senses can perceive it. Whether the advertising is presented in a sophisticated video on a national TV network, a jingle heard on the radio, or on a sign in a store window, it will be governed by the law.

The central rule on advertising is to encourage sufficient disclosure to protect the public from the unscrupulous snake-oil salesman. The ad that has the very small font found at the bottom of many print ads or the voice that can talk at supersonic speed at the end of a TV or radio commercial might seem to be useless, but it is often important and very relevant. Failure to include the little details can often land your business in a world of trouble.

Once a price tag or a claim of a business includes more than just the cost of the service or product i.e., facts are added (“free”, “instant rebate”, “today only”, “guaranteed”, ) – the business may be required to make additional disclosures. The public will hold the businesses’ feet to the fire if a fact the public considers to be important has been omitted and they feel deceived. When consumers are involved, perception becomes reality and if they believe a certain detail is important, the ad better contain it in order to protect the buyer – often from himself.

Questions to ask include where will your ad appear, in what medium ,and what is the intended target? With the choices of advertising media available to a business, it is not uncommon for an ad to reach an audience that was not intended to see the ad. In fact, an ad intended for buyers in Houston, Texas could be put on the internet and can be viewed by a consumer in another country. Because of today’s technology and the fact that instant communications that can cover an entire continent in an instant, a business might not know what laws could be broken in a jurisdiction different from where the business is located. Therefore, the best advice a lawyer can provide to a business client is to include in its ads only those terms that a reasonable person would believe necessary in order to complete a purchase such as when, where and how the business intended a typical commercial transaction to occur.

The general rule – don’t deceive the public – is subjective, and law enforcement will bring their own preconceived ideas of what should (and should not) be included in a properly crafted advertisement. A business can tempt, but don’t mislead.

Texas law prohibits a business from advertising services and/or products with the intent not to sell them as advertised – both as to condition and price. A deceptive violator can face civil and criminal penalties. Nothing infuriates the public more than the bait and switch — where a business advertises a certain product to entice the public, doesn’t have adequate supply to meet demand, and tries to sell the buyer a substitute service or product. The authorities will act quickly if the business intentionally created an excessive demand for its supply, and the substitute offered is inferior and more costly.

Simply stating “While supplies last” is not sufficient to protect a business that should have anticipated large demand and did not prepare for it. A business should disclose if it only has a few of the advertised products so that the customer knows his chances of getting the advertised products are not promising. Additionally, the business could disclose limitations on purchases per customer, and other important conditions of sale should be included in the ad to avoid additional deceptiveness claims (e.g., if additional delivery charges apply).

The Better Business Bureau is a great source for guidance on how to properly conduct one’s business and it has lots of experience with deceitful marketing practices. Many of the do’s and don’ts of advertising can be found on their website at www.bbb.org.

The primary rule to follow is not to deceive, and by using common sense. If a business can place itself in a customers’ shoes, the business can usually determine if more disclosure should be included in your ads. Don’t be too reluctant to state the obvious or to include the fine print details, even when it may increase the size of the ad – it may help your business avoid complaints and lawsuits. Advertising that fully informs will be more beneficial to your business in the long run.


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