Livens & Reed, PLLC

Critical mistakes with your inheritance and the IRS

One of the greatest gifts in the world can also be the most costly in terms of taxes and the IRS. If one is the heir of a baby boomer in Texas, chances are his or her benefactor may have been saving a bundle in IRAs and employer sponsored accounts toward an inheritance. Over a lifetime, baby boomers reduced their tax bills using these plans, and an estimated $30 trillion in wealth will be handed down over the next 30 to 40 years.

If one has big plans for the inheritance that has just been received -- maybe a dream vacation, buying that dream car or paying off a home mortgage -- be prepared for IRS sticker shock. Traditional IRAs and 401(k) plans are great for saving since they are tax deferrable and more money is invested as it is earned, but cashing these accounts in after inheriting them will cost plenty. The tax fees alone can be staggering.

Knowing what options are available and planning properly is key. The most expensive option is a lump-sum withdrawal. These withdrawals will plunge an heir into the highest income-tax bracket. One can expect to pay upwards of 39.6% to the IRS, depending on the amount, which is almost half of the entire inheritance!

The spouse of an account owner in Texas can greatly reduce the taxes paid by assuming ownership of inherited IRAs and 401(k) accounts. Non-spouse heirs are required to begin making withdrawals after the owner's death. Estate planning includes considering one's choices carefully and seeking the advice of a proficient attorney. An attorney's knowledge and experience will be able to provide the best possible options to reap long-term benefits of an inheritance.

Source: The Motley Fool, LLC, "Don't Make This Big Mistake With Your Inheritance -- The Motley Fool", Todd Campbell, Sept. 4, 2017

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