Who does not want to be Paris Hilton?

November 21, 2014 by Eric Linden

Inheriting money is kind of nice for people. You have usually done nothing to earn it but be born. You most likely have not worked for it. You just find out you have some money coming to you. Before you book your flight to Paris, there may be some things you need to know in regards to TAXES! Yup, you cannot escape from Uncle Sammy’s reach even as you grieve your favorite uncle’s untimely passing.

Although you may be tempted to blow that whole IRA, you could be paying up to 40% in taxes! Not good. Tax-wise, it is best not to accept a “lump sum” inheritance. Spreading it out over time and taking distributions can help lessen your tax liabilities.

Upon inheriting an IRA, beneficiaries can stretch out their inheritance and avoid a big tax hit. This technique allows both spouse and non-spouse beneficiaries to leave most of the inheritance growing tax-deferred, while only taking out the required amount and minimizing what they’re taxed on each year.  Warning: If you fail to take out any Required Minimum Distribution (RMD), the penalty, in addition to the tax, is 50% of the amount that should have been withdrawn. And the rules are different depending on whether the deceased had reached 70.5 years of age or not.

If you are fortunate enough to inherit different types of IRAs (Roth, traditional, SEP, etc.) from other dearly departed IRA owners, you are not allowed to combine them into a single inherited IRA, even though that would be easier recordkeeping.  Second warning: A spouse has different (and kinder) rules than a non-spouse.

Also, note that the United States Supreme Court recently ruled that an inherited IRA held by a non-spouse beneficiary is not exempt from attachment by creditors under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

Bottom line, taxpayers: if you did not get a piece of that Facebook IPO windfall, your next best bet is to be born into the Hilton family.