IRA rules can make probate administration complicated

| Feb 22, 2017 | Probate Litigation |

Many Texas residents have individual retirement accounts as part of their investment portfolios. IRAs are attractive to investors due to beneficial tax considerations. However, investors should be aware of tax rules when including an IRA in their estate. A recent ruling by the U.S. Tax Court details a complicated case involving an IRA involved in probate litigation.

A man in another state passed away in 2006, having specified in his will that most of his estate would be left to his wife. The estate included a traditional IRA and a vintage motorcycle. The funds in the IRA were frozen until the issue could be resolved after the man’s son contested the will.

The probate court determined that the widow would pay the man’s son a specified amount from the IRA funds and transfer the motorcycle to him. After the funds were unfrozen, she made the payment to the son and also took other distributions from her IRA. According to the settlement, the payments from the IRA were to be free of any tax. However, the widow received tax documents indicating that the distributions were taxable from her IRA.

The widow did not report the distribution as taxable income and later received a notice of deficiency from the IRS. She contested the decision in Tax Court. However, the court upheld the IRS ruling, and she was required to pay income taxes and penalties on the IRA distributions. The court maintained that though the widow had not received appropriate counsel during the litigation process, she was still liable for the taxes on the IRA distribution.

Texas families hoping to avoid lengthy probate litigation often seek counsel from experienced estate administration attorneys. A seasoned lawyer would help an individual understand tax implications when planning his or his estate. An adviser with a thorough knowledge of IRA rules could help those in similar situations minimize tax implications and avoid other complications with their estates.

Source: financial-planning.com, “When an inherited IRA becomes a tax nightmare“, Ed Slott, Feb. 17, 2017