THE UNLIKELY INHERITANCE
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Instead, the assets will pass to the contingent beneficiary as if the first beneficiary had died. In the case of an intestate death, state law will determine the next beneficiary. Income taxes on assets received from an inherited IRA are due on each distribution.
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Before a beneficiary removes assets from an IRA, they should consider how the IRA's contents might grow if a younger person—for example, a child or a grandchild—were to receive the account. A year-old beneficiary, for example, would have to liquidate the IRA within But if that beneficiary disclaimed the account and a year-old grandchild were the contingent beneficiary, the money could remain in the IRA for 63 years. That's almost four decades of additional tax-deferred growth.
Plus, the grandchild might be in a lower income tax bracket than the original beneficiary. However, if you have an IRA and you wish to give your primary beneficiary this added flexibility when they inherit the IRA, you need to plan ahead. You should ask yourself these two questions:. To answer these questions, you'll have to find your will and double check its contents. The form has spaces for you to name primary and contingent IRA beneficiaries.
Check with your IRA custodian to confirm they have the correct information, or have your lawyer check on your behalf. It is important to update your IRA beneficiary form as changes occur in your family or your personal situation e. Keep in mind that the disclaimer is irrevocable; the person who disclaims the property can't come back later, after a failed business or stock market slump, for example, and reclaim those assets.
Another estate-planning tool that uses disclaimers is a disclaimer trust. You can use this type of trust to make sure that your beneficiary will have an income from the disclaimed property. However, the trust must be established while you are alive. Assets up to the amount of your available exemption equivalent can transfer to the trust after your death, but the surviving spouse has nine months to decide how much to put in the trust, depending on their situation and the inheritance-tax laws at that time. Typically, your surviving spouse will be the income beneficiary of the trust, but they cannot withdraw principal.
Following their death, the trust assets usually pass to the next beneficiary in line, thereby avoiding federal estate taxes along the way. A disclaimer trust can give your survivors the flexibility they need to deal with shifting exemption equivalent amounts, tax laws, family needs, and net worth.
Plus, it is a method of post-mortem estate planning that gives you some control over who eventually ends up with your assets. When executed correctly, a qualified disclaimer trust could save a family hundreds of thousands of dollars in federal taxes. In addition to reducing federal estate and income taxes, there are a few more reasons why a beneficiary may want to disclaim inherited assets:.
- The Unlikely Inheritance.
- The Phoenix Project.
John designates his son, Tim, as the sole beneficiary of the assets in his retirement plan. When John dies a few years later, Tim stands to inherit the money, but if he does, he will no longer be eligible for student aid at college. Tim decides to disclaim the assets. He therefore properly disclaims the assets and is now treated as if he never was the designated beneficiary.
Note, as explained above, that if John designated a contingent beneficiary, that person or entity , would become the successor beneficiary. Trusts can be used in estate planning to give individuals and couples greater control over how assets are transferred to heirs with the fewest tax consequences.
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Sometimes, however, disclaiming assets makes the most sense. No special form or document must be completed to disclaim inherited assets. A letter usually suffices, providing it meets the above requirements. Talk to your tax professional to find out under which circumstances tax consequences could arise when disclaiming inherited assets. These may not apply to you, but they may apply to the successor beneficiary. Some disclaimers may require court approval if, for instance, the individual disclaiming the assets is mentally incapacitated or a minor.
By using Investopedia, you accept our. Thus, every affected individual must have an affected parent. A pedigree with affected individuals in every generation is typical of AD diseases. However, beware that other modes of inheritance can also show the disease in every generation, as described below. It is also possible for an affected individual with an AD disease to have a family without any affected children, if the affected parent is a heterozygote.
This is particularly true in small families, where the probability of every child inheriting the normal, rather than disease allele is not extremely small. Note that AD diseases are usually rare in populations, therefore affected individuals with AD diseases tend to be heterozygotes otherwise, both parents would have had to been affected with the same rare disease.
Achondroplastic dwarfism, and polydactyly are both examples of human conditions that may follow an AD mode of inheritance. Figure 5. In X-linked dominant inheritance, the gene responsible for the disease is located on the X-chromosome, and the allele that causes the disease is dominant to the normal allele in females. Because females have twice as many X-chromosomes as males, females tend to be more frequently affected than males in the population.
However, not all pedigrees provide sufficient information to distinguish XD and AD. One definitive indication that a trait is inherited as AD, and not XD, is that an affected father passes the disease to a son; this type of transmission is not possible with XD, since males inherit their X chromosome from their mothers. Diseases that are inherited in an autosomal recessive pattern require that both parents of an affected individual carry at least one copy of the disease allele.
With AR traits, many individuals in a pedigree can be carriers, probably without knowing it.
What is inheritance tax and who pays it?
Thus, the major feature that distinguishes AR from AD or XD is that unaffected individuals can have affected offspring. Newborns are often tested for a few of the most common metabolic diseases. Eric T. Because males have only one X-chromosome, any male that inherits an X-linked recessive disease allele will be affected by it assuming complete penetrance. Therefore, in XR modes of inheritance, males tend to be affected more frequently than females in a population.