IRA accounts are one of the many asset types that one can inherit that are fraught with peril for the unwary. The inheritance and tax rules for IRA accounts are different for those who are the spouse of the decedent and those that are not. Spouses can receive special tax status for inherited IRA account funds.
If you are not the spouse you cannot treat the IRA as your own. The tax rules give several options for how a non-spouse can take distributions from the IRA account. Despite what one may have read on the internet, you do not have to take the IRA as a lump sum distribution when it is inherited. The tax rules allow beneficiaries to spread payments over several years. This is important since IRA funds are not subject to income tax until they are distributed to the beneficiary.
If the person you are inheriting the IRA account from had a basis in that account, that basis will remain with the IRA. Spouses have some flexibility as to how they treat the inherited IRA, but one must tread carefully.
As with all things related to taxes and IRS, the regulatory landscape is subject to change without notice.
Before accepting any distributions from an inherited IRA, you must talk to an experienced tax professional to insure that you maximize your inheritance and don’t find yourself in an ugly tax situation with the IRS.
For 2012 Tax Season (as of 1/3/2012):
Federal Estate Tax Exemption = $5.12 million
Maximum Estate Tax Rate = 35%
Annual Gift Exclusion = $13,000
Business Mileage per Mile = 55.5 cents
Charitable Mileage, per mile = 14 cents
For more see: IR-2011-104
The sole purpose of an Income Cap Trust is to qualify an individual for Medicaid assistance. When an elder has fixed income over a certain limit (in 2011 it is $2,022 a month gross income), the elder will be unable to qualify for Medicaid assistance. When the current average cost of assisted care is over $5,000 a month, the Medicaid limit would make it impossible for many elders to get assistance. When the gap between the Medicaid limit and the cost of care is so wide, many elders would be without a place to live. This is where an Income Cap Trust comes in.
The elder can create an Income Cap Trust to receive all of the elder’s fixed income. The trustee for the Trust would then use the income to pay the elder’s monthly expenses as required by Medicaid law. Such expenses include: personal needs allowance and maintenance; trust administrative costs; community spouse allowance; health insurance premiums; burial plans; incurred medical expenses; other reserves; and patient liability to care facility.
There are three parties to the Income Cap Trust – the grantor who signs the trust, the beneficiary who benefits from the trust, and the trustee who administers the trust. Usually the grantor and beneficiary are the same person. The beneficiary cannot be the trustee and usually the trustee is a family member or friend of the beneficiary.
To establish the Income Cap Trust, the legal document creating the trust is drafted by an elder law or estate planning attorney. The document is executed and the trustee deposits the income into a new bank account established by the trustee in the name of the Income Cap Trust. The trustee then pays expenses according to the budget prepared by the attorney and approved by the Medicaid case worker.
After the elder passes, any remaining funds in the trust will go to the state. Generally, however, there will be no funds remaining in the trust when the elder passes away.
A special needs trust holds assets, and possibly income, for the beneficiary’s quality of life expenses. The trust can be established by the beneficiary or by a third party, such as a relative. A third party trust can help to increase a beneficiary’s quality of life without disqualifying the beneficiary for Medicaid. The income from a special needs trust can be used for supplemental needs that include costs of hobbies, vacation trips, recreational activities and socialization programs, as well as augmenting training in vocational and independent living skills.
If the beneficiary is under the age of 65, the beneficiary can establish the special needs trust with their own funds and assets. If the beneficiary is 65 or older, the beneficiary cannot use their own assets and funds to establish the trust.
Special needs trusts are governed by strict rules that require careful planning and drafting by an attorney.
Family and friends can set up a special needs trust for loved ones receiving Medicaid. These trusts can be set up during the donor’s lifetime or at the donor’s death.
The beneficiary of a special needs trust cannot also be the trustee of the trust. A trusted individual or a professional trustee will need to be appointed as trustee. The trustee has a fiduciary duty to the beneficiary to manage the trust assets in a prudent manner for the benefit of the beneficiary. A common solution to the trustee liability problem is to have the trust administered and managed by a non-profit pooled trust.
The Financial Crimes Enforcement Network has released an advisory to financial institutions regarding spotting and reporting on activities involving elder financial exploitation. FinCEN released the advisory because financial institutions may be uniquely positioned to observe such exploitation.
The following examples are “red flags” that may necessitate the filing of SAR reports:
Erratic or unusual banking transactions, or changes in banking patterns:
- Frequent large withdrawals, including daily maximum currency withdrawals from an ATM;
- Sudden Non-Sufficient Fund activity;
- Uncharacteristic nonpayment for services, which may indicate a loss of funds or access to funds;
- Debit transactions that are inconsistent for the elder;
- Uncharacteristic attempts to wire large sums of money;
- Closing of CDs or accounts without regard to penalties.
Interactions with customers or caregivers:
- A caregiver or other individual shows excessive interest in the elder’s finances or assets, does not allow the elder to speak for himself, or is reluctant to leave the elder’s side during conversations;
- The elder shows an unusual degree of fear or submissiveness toward a caregiver, or expresses a fear of eviction or nursing home placement if money is not given to a caretaker;
- The financial institution is unable to speak directly with the elder, despite repeated attempts to contact him or her;
- A new caretaker, relative, or friend suddenly begins conducting financial transactions on behalf of the elder without proper documentation;
- The customer moves away from existing relationships and toward new associations with other “friends” or strangers;
- The elderly individual’s financial management changes suddenly, such as through a change of power of attorney to a different family member or a new individual;
- The elderly customer lacks knowledge about his or her financial status, or shows a sudden reluctance to discuss financial matters.
A SAR (Suspicious Activity Report) must be filed if a financial institution knows, suspects, or has reason to suspect that a transaction has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage, and the financial institution knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction, the financial institution should then file a Suspicious Activity Report. See, e.g., 31 CFR § 103.18(a) (future 31 CFR § 1020.320(a))