Dealing with an inheritance can be challenging, especially when it involves dividing financial assets among siblings. Understanding the Inherited IRA split between siblings is an important part of this process. An Inherited IRA, or Individual Retirement Account, allows beneficiaries to inherit funds from the original account holder while enjoying tax-deferred growth. When a parent passes away and leaves behind an IRA, siblings may find themselves in a position where they need to share this inheritance.
Knowing the steps to take can make a big difference in achieving a smooth transition and fair distribution. This guide will walk you through the entire process, guaranteeing you comply with the rules and make informed decisions about your inheritance.
Understanding Inherited IRAs
Before we explore the steps for splitting an Inherited IRA between siblings, it’s essential to understand what an Inherited IRA is and how it works. An Inherited IRA is an account that a beneficiary establishes to receive the funds from a deceased person’s IRA.
It differs from a traditional IRA in that the beneficiaries cannot contribute additional funds to it. Instead, they must take required minimum distributions (RMDs) based on specific rules. This separation helps avoid potential conflicts and assures that each beneficiary can control their distributions and tax planning.
In the case of an Inherited IRA split between siblings, each sibling typically receives a separate account to manage their share. This separation helps avoid potential conflicts and assures that each beneficiary can control their distributions and tax planning.
Step One: Determine Beneficiaries and Their Shares
The first step in dividing an Inherited IRA between siblings is determining who the beneficiaries are and what their respective shares will be. The deceased parent’s will or estate plan usually outlines this information. However, it’s important to check the IRA’s beneficiary designation form, as this takes precedence over the will.
Once you have confirmed the beneficiaries, you need to determine the share each sibling will receive. If the IRA account holder designated specific percentages, follow those instructions. If the division is not specified, siblings may need to agree on an equal split or decide on a different arrangement.
Step Two: Set Up Separate Inherited IRA Accounts
After determining the beneficiaries and their shares, the next step is setting up separate Inherited IRA accounts for each sibling. This process involves contacting the financial institution that holds the original IRA and requesting a transfer of assets into new Inherited IRA accounts under each sibling’s name. It is crucial to verify that the account titles indicate that these are Inherited IRAs to avoid tax penalties and compliance issues.
For example, if the deceased parent was named John Doe, the account title for an Inherited IRA for a beneficiary named Jane Doe should read something like “Jane Doe, Beneficiary of John Doe, Deceased.” Properly titling the accounts helps ensure that the IRS recognizes these as Inherited IRAs and not as traditional or Roth IRAs.
Step Three: Understand the Rules and Tax Implications
Understanding the rules and tax implications associated with Inherited IRAs is critical to avoiding costly mistakes. The Secure Act of 2019 changed some rules regarding distributions from Inherited IRAs, particularly for non-spouse beneficiaries. Under the current regulations, non-spouse beneficiaries, including siblings, are required to deplete the Inherited IRA within ten years of the original account holder’s death. This is known as the 10-year rule.
Before the Secure Act, beneficiaries could take distributions over their lifetimes, spreading out the tax burden. Now, siblings must plan their withdrawals carefully to manage tax liabilities. Failing to deplete the account within the 10-year timeframe can result in significant penalties.
Additionally, if one of the siblings is a minor, the 10-year rule does not start until they reach the age of majority. This can provide some flexibility in managing distributions for younger beneficiaries.
Step Four: Calculate Required Minimum Distributions (RMDs)
In addition to understanding the 10-year rule, beneficiaries must calculate their required minimum distributions (RMDs) for the Inherited IRA. RMDs are mandatory withdrawals that beneficiaries must take each year. The amount is based on the account balance and the beneficiary’s life expectancy, as determined by IRS tables.
While the Secure Act mandates that the entire account be emptied within ten years, beneficiaries can still choose to take RMDs annually to spread out the tax burden. By calculating and planning RMDs, siblings can strategically manage their tax obligations and potentially keep more money in the account for growth over time.
Step Five: Decide on A Distribution Strategy
Once you have calculated the RMDs, it’s time to decide on a distribution strategy that aligns with your financial goals and tax planning. There are several options available for beneficiaries, each with its benefits and drawbacks.
Some siblings may choose to take equal distributions each year, providing a steady stream of income. Others may opt to delay withdrawals until closer to the end of the 10 years to maximize tax-deferred growth. It is essential to discuss these options with a financial advisor or tax professional to determine the best approach for your situation.
Step Six: Keep Communication Open Between Siblings
Splitting an inherited IRA between siblings requires clear and open communication to avoid misunderstandings and disagreements. Regular discussions about account management, distribution plans, and any changes in financial circumstances can help maintain a harmonious relationship among siblings.
Siblings should review their beneficiary designations on all financial accounts, including IRAs, 401(k)s, and life insurance policies, to make sure they align with their current intentions. Regularly updating estate plans can help avoid potential conflicts and ensure that your assets are distributed according to your wishes.
Step Seven: Review Beneficiary Designations and Estate Plans
Dividing an Inherited IRA is also an excellent opportunity for siblings to review their own beneficiary designations and estate plans. Confirming that your estate plans are up-to-date and accurately reflect your wishes can prevent future complications for your heirs.
Siblings should review their beneficiary designations on all financial accounts, including IRAs, 401(k)s, and life insurance policies, to make sure they align with their current intentions. Regularly updating estate plans can help avoid potential conflicts and ensure that your assets are distributed according to your wishes.
The Role of Nevada Trust Company
At Nevada Trust Company, we understand the complexities of managing inherited assets and are here to help you navigate the process of splitting an Inherited IRA between siblings. Our firm specializes in providing market-leading trust and investment management services tailored to meet your unique needs. Whether you require assistance with estate planning, trust administration, or investment management, we are dedicated to supporting you every step of the way.
Dividing an Inherited IRA between siblings requires careful planning, clear communication, and a thorough understanding of the rules and tax implications. By following the steps outlined in this guide, you can ensure a fair and smooth distribution of assets while minimizing tax liabilities and maintaining strong family relationships. Remember, professional guidance can make all the difference in making informed decisions that align with your financial goals. At Nevada Trust Company, we are here to support you in navigating the complexities of inherited assets, so you can focus on what matters most – your family’s future.
For more information about our investment management services, get in touch with us.
