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We understand how difficult and uncomfortable it can be when you and your siblings have to divide an inheritance. It’s natural to feel frustrated and want to ensure you get what is rightfully yours. However, it’s important to take a step back and try to approach the situation with empathy and understanding for one another. That way, your inheritance can be divided in a way that is both fair and respectful. In this blog post, we’ll break down the ins and outs of inherited retirement accounts and four tips for splitting an inheritance without the drama.
What is an Inherited IRA and How Does it Work?
An inherited IRA (or individual retirement account) is opened when you inherit a tax-advantaged retirement plan like an IRA or 401(k) after the owner’s death. Once inherited, you will typically need to move the assets from the original owner’s account to your own name. Tax treatment on these accounts is the same as if the owner were still alive. However, depending on what type of beneficiary you are—and whether or not the original owner took their required minimum distributions (RMD—there are many different choices you’ll need to make regarding the account. Due to recent tax law changes and the confusion around it, it may be best to speak with a professional before making any decisions at all.
4 Ways to Keep an Inheritance From Becoming a Source of Conflict
Family disputes are normal, but when the source of contention is centered around money, it’s a whole other beast. To tackle these disputes head-on and ensure your inheritance doesn’t destroy your family, here are four tips for splitting an inheritance.
#1 Know Your Responsibilities Under the Law
Tax laws seem to change like the wind. In the case of Inherited IRAs or other retirement accounts, the laws last changed in 2020 with the passing of the SECURE Act. For non-eligible beneficiaries like adult children, the biggest change was the requirement for inherited accounts to be depleted within 10 years. Before, beneficiaries would be allowed to take RMDs over their lifetime, lowering their tax bill. Now you and your siblings no longer have that option. And to maximize your tax benefits and lessen the burden on you financially, you’ll have to put your grievances aside so that everyone stands to benefit.
#2 Have an Open Line of Communication
Establishing an open line of communication with your siblings is crucial when dividing an inheritance. It can be hard for some families to navigate conversations about money, especially when other emotions like sadness or resentment get involved. That’s why it’s important to ensure everyone feels heard in the discussion and all sides are considered. It may also be helpful to set ground rules at the outset of the conversation, so no one gets too heated—for instance, agreeing not to talk over each other or raise voices.
#3 Agree on What to Do With the Accounts
Under the SECURE ACT, you and your siblings must decide what to do with the inherited assets within the first year after your parent’s death. Generally, you have three options:
- Cash-out the account and split the funds among you
- Transfer the account into a jointly-owned Inherited IRA
- Transfer the account into separate sole-ownership Inherited IRAs
Whichever option you choose, taxes will be a factor. Any taxable distributions you take over the 10 years should be reported as income. You’ll also need to balance the tax advantages of letting the assets grow with the tax liability of taxing funds out. Don’t let greed get in the way of the bigger picture.
#4 Talk to an Estate Planning Lawyer
With the new tax guidelines and more changes underway, splitting a retirement inheritance between beneficiaries is more complicated than ever. To ensure each sibling benefits from your parent’s estate, you will need expert legal guidance to build a plan that protects those assets. An estate planning lawyer can explain the relevant tax laws, how to use the system in your favor, and even create an estate plan that ensures that your children don’t go through the same thing. The great news? You’re already in the right place.
Don’t Let Greed Destroy Your Relationship—Call Hermance Law
Dealing with inherited retirement accounts is tricky. Understanding the basics of inheritance and knowing your rights when splitting up the funds is important. Ultimately, the best way to ensure your greedy siblings don’t stand in the way of a great financial opportunity is by hiring an experienced estate planning lawyer. Contact our team at Hermance Law today to maximize your inheritance.