If I name my daughter as the beneficiary of my retirement accts, can she roll these funds into her own retirement acct tax-free?

Asked about 4 years ago - Bothell, WA

I am trying to figure out my will, and would like to give one daughter my house and the other my 457 and regular IRA; I want to keep the value of these similar, and need to know about the tax implications

Attorney answers (5)

  1. Daniel Orville Kellogg

    Contributor Level 11
    Best Answer
    chosen by asker

    Answered . If your ultimate objective is to create approximate equivalence in the value of your estate that passes to your two daughters, your objective is going to be difficult to accomplish because: (1) the value of the qualified plans and your home are going to vary from time to time in a very unpredictable fashion; and (2) the tax treatment of your qualified plans and your home will be so different in the hands of your daughters that it is difficult to even begin to calculate the ultimate effect.

    Two suggestions that might help:

    1. Name your one daughter as primary beneficiary of the qualified plans; provide in your Will (or Revocable Living Trust) that your other daughter will inherit your home; then provide in your Will (or RLT) that the remainder of your assets will be distributed between your daughters in such a fashion that, when taking into account the values of the qualified plans and the home as of the date of your death, the ultimate distribution is approximately equal.

    2. Name your daughter as primary beneficiary of the qualified plans; provide in your Will (or RLT) that the remainder of your assets will be distributed between your daughters in such a fashion that, when taking into account the value of the qualified plans, the ultimate distribution is approximately equal; then your daughters can work out between themselves after your death whether the other daughter will take the home as part of her inheritance.

    Both of these suggestions suffer from the risk that the disparity in value between your qualified plans and the home will be so great that the value of your other assets will be insufficient to equalize the ultimate distributions to your daughters.

    And in both cases, you have to consider what result you want to realize if the daughter that is the beneficiary of the qualified plans dies before you. In that case, it might be preferable to name the other daughter as the contingent beneficiary so that she can continue to defer the recognition of the income on the qualified plans. But the deceased daughter may have children that you would want to benefit if their mother predeceased you.

    Finally, neither of the foregoing suggestions will deal effectively with the disparity in the tax treatment of the qualified plans vs. the home in the hands of your daughters. The daughter that receives the qualified plans will ultimately have to pay the deferred income tax at her marginal rate (25%+) on the entire value of the qualified plans. The daughter that receives the home will likely escape capital gains income tax on the home if she owns and occupies the home for two out of the five years immediately preceding her ultimate sale thereof (assuming that her capital gain does not exceed her individual exclusion of $250,000, or $500,000 for a married couple). So, in simple terms, a "$100,000 IRA" is not equal to a "$100,000 house" in terms of the tax treatment in the hands of your daughters.

    It's always hard to argue with keeping things equal (and simple). If your two daughters equally inherit the qualified plans and your home and other assets, the daughter that you want to ultimately have your home can use her 50% interest in the home as her down payment to get a loan to pay off the other sister. Or she could use her share of your other assets to fund the purchase of her sister's share of the home. This minimizes the risk that the ultimate distribution will be unequal, and the risk that the ultimate tax treatment on the assets will not be equivalent.

    You have much to consider. Good luck.

    Dan Kellogg
    Renton, WA

  2. Timothy Clement Burkart

    Contributor Level 8

    Answered . I agree with Constance Smith in regard to the IRA. However, you need to be careful about trying to distribute you estate equally to your children, but giving each of them different assets. It is possible that your home and your retirement account will appreciate at different rates. Moreover, under the current law, the child receiving the house will likely receive a new income tax basis at your death equal to the fair market value of the house at that time while the child receiving the IRA will have to pay income tax on the distributions from the IRA, unless it is a ROTH IRA. Thus even if the value of the house and the IRA are the same at your death, the child receiving the IRA will still recieve less as he or she will have to pay income tax on the distributions. It is possible to draft an equalization clause in your Will that can result in a fairer distribution of your assets to your children.

  3. David Lee Rice

    Contributor Level 7

    Answered . Pursuant to the Pension Protection Act of 2006, your beneficiaries should not be able to roll over your IRA and your 457 plan to an inherited IRA and take the distributions out over their lifetime. The distributions will be subject to ordinary income tax when taken out. Depending upon the size of your estate and the estate law in effect upon your death, it is also possible that the part of the estate, including your retirement plans could be subject to an estate tax and if so, the beneficiaries would be entitled to offset some of the income tax with an itemized deduction resulting from the estate tax.

    Nothing construed herein shall create any attorney-client relationship nor shall constitute any legal advice. The answer provided herein was for general information and shall not be deemed to apply to anyone with a similar situation. You should consult with tax counsel immediately in dealing with the naming of beneficiaries of any retirement accounts. You may not rely upon this advice for the waiver of any penalties under Section 230.

  4. Constance D Smith

    Contributor Level 7

    Answered . I agree with David, except that under current tax law, your beneficiaries CAN roll over your IRA or 401(k) to be their own retirement account. In the past they would have had to leave it in your name as an "inherited IRA" that could have been subjected to a shorter payout period than the beneficiary's life. Also, under current law, if rolled over to her name, your daughter can name her own successor beneficiaries and the beneficiaries you named to follow your daughter are ignored.

    Nothing construed herein shall create any attorney-client relationship nor shall constitute any legal advice. The answer provided herein was for general information and shall not be deemed to apply to anyone with a similar situation. You should consult with tax counsel immediately in dealing with the naming of beneficiaries of any retirement accounts. You may not rely upon this advice for the waiver of any penalties under Section 230.

  5. Justin Jay Watling

    Contributor Level 15

    Answered . I do not agree with Ms. Smith that your child can ROLLOVER the qualified account (IRA, 457 plan). Only a surviving spous can do a ROLLOVER. Your child can oly obtain an INHERITED IRA. That IRA cannot be combiined with any of your child's IRAs (a spouse can combing rolledover IRS with his/her existing IRAs).

    Morerover, a child MUST begin taking a required minumum distribution (RMD) in the year following the year of death. There is no such requirement on a spouse who elects rollover treatment. That RMD must start in the year following the year of death. Your RMD, if you are over 70 and a half, must be made prior to the move of the IRA to inherited status.

    I agree that your child can use her age to compute the RMD for the inherited IRA.

    I also agree that your child can designate her desired beneficiary of the inherited IRA.

    With the 457 plan, your child might have options similar to the IRA, but some 457 plans are structured to require full payout withiin a year and might not be able to be stretched over the life of your child.

    From the breadth of the responses you have received, it should be clear to you that you need to consult directly with an experienced estates and trusts attorney ASAP.

Can't find what you're looking for? Ask a Lawyer

Get free answers from experienced attorneys.

 

Ask now

24,817 answers this week

2,895 attorneys answering

Ask a Lawyer

Get answers from top-rated lawyers.

  • It's FREE
  • It's easy
  • It's anonymous

24,817 answers this week

2,895 attorneys answering