A Tale of Two Spouses Inheriting IRAs

Ann and Zelda are both 72 years young and now widows after their 74-year-old spouses died this year. Both inherited an IRA from their spouse in the amount of $100,000. Ann’s advisor had her move the funds to an inherited IRA. The account is titled Alan, deceased, IRA fbo Ann. Zelda’s advisor had her move the funds into an IRA in Zelda’s name. The account is titled Zelda’s IRA.

There age and circumstances are where the similarities end. From here their stories are very different.

Ann’s Inherited IRA
As a beneficiary, Ann must calculate her required minimum distributions (RMDs) based on her age. Her factor comes from the IRS Single Life Table. When she takes her first RMD in 2015 at the age of 73, her life expectancy factor is 14.8 years. Assuming no earnings on her IRA, she divides the $100,000 by 14.8 and learns she has to take a distribution of $6,757 in 2015.

Ann named her children as the beneficiaries of her inherited IRA. Brad is 45 and Cathy is 40. At Ann’s death, both Brad and Cathy will continue using Ann’s age to calculate their RMDs. Assuming Ann dies in 2015, Brad and Cathy will have to use a factor of 13.8 in 2016 (based on Ann’s age in 2015 and reduced by one).

Zelda’s IRA
As an account owner, Zelda will calculate her RMDs based on her age and a factor from the IRS Uniform Lifetime Table. For a 73 year old, the life expectancy factor is 24.7 years. Dividing her balance of $100,000 by 24.7 means Zelda has an RMD of $4,049.

Zelda named her children, Xavier and Yvette, as the beneficiaries of her IRA. They are 45 and 40. At Zelda’s death in 2015, they will both get to use their own ages to calculate their RMDs. Xavier will have a single life expectancy factor of 37.9 (age 46) and Yvette (age 41) will have a factor of 42.7 (based on their ages in 2016).

If only RMDs are taken from Zelda’s account, her account will last much longer than Ann’s account. Zelda’s RMD is smaller and the RMDs to her children, when they inherit, will be smaller. This will make the account last longer and will reduce the amount of income tax that will have to be paid each year on the RMDs.

The difference is $2,708 in the first year ($6,757 - $4,049) . The difference in the life expectancy factors for the children is almost 30 years of distributions. Zelda’s children will have 30 years more of distributions than Ann’s children. It’s the difference of A to Z.

- By Beverly DeVeny and Jared Trexler, from the SLOTT REPORT

Health Care Powers of Attorney

By: Stephen C. Hartnett, J.D., LL.M., Associate Director of Education, American Academy of Estate Planning Attorneys Posted in Estate Planning, Legal Education

Last week, I blogged about the importance of powers of attorney, in general. I focused on financial powers of attorney and their potential abuse.

This week, I’ll focus on health care powers of attorney. This is one of the typical documents in a basic estate plan. However, people often give little attention to thinking about this POA. People do not like thinking of their own mortality or their own illness. But, unfortunately, it involves issues we all must face eventually. A health care power of attorney may vary from state to state. In some states it includes a living will or health care directive, in other states that may be a separate document. The person who is appointed as the agent is the one who is given the authority to consent (or withhold consent) for medical treatments.

Of course, it is important for a client to give thought to all of the people they might appoint in fiduciary roles, like Trustee, financial POA agent, and health care POA agent. But, perhaps the health care agent is most important of all. This person literally may have life and death decisions in their hands. That is why it is so important to choose the right person for that role. Above all, you want someone with good judgment who will comply with the client’s wishes, even if those wishes may not be identical to the decisions the agent might make for themselves.

Along this line, it is important to remember that the client should do a new health care POA if their relationship with the agent changes. For example, if someone names their spouse as their agent and later gets divorced, state law may or may not revoke the designation, depending upon the state. It is best to do a new health care POA after divorce. Otherwise, the client may have the unfortunate surprise of having their ex-spouse as their health care agent.

The health care POA is an important document. It’s important to stress the importance of choosing the right agent, and having the client alert you of any changes in circumstances.

Stephen C. Hartnett, J.D., LL.M.Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com