Retirement accounts typically sidestep probate proceedings in California. This is primarily because they function as transfer-upon-death instruments. The crucial step here is to designate beneficiaries correctly for your retirement accounts, ensuring they receive the assets as you intended.
Do retirement accounts pass through probate? NO, as long as the beneficiaries are properly designated. Keep in mind that if the will stipulates anything about such accounts, the named beneficiaries take precedence over the will and the assets will be distributed to the named beneficiaries on the accounts.
Beneficiaries of an IRA, and most plans, have the option of taking a lump-sum distribution of the inherited account at any time. Beneficiaries must include any taxable distributions they receive in their gross income.
First and foremost, there are a number of asset types that typically do not pass through probate. This includes life insurance policies, bank accounts, and investment or retirement accounts that require you to name a beneficiary.
They include IRAs, 401(k)s, pensions, life insurance policies, and certain bank and brokerage accounts. Ownership on these non-probate assets can transfer faster to your beneficiaries than those assets that must go through probate (i.e. real estate).
Establish a living trust: This is a common way for people with high-value estates to avoid probate. With a living trust, the person writing the trust decides which assets to put into the trust and who will act as trustee.
If multiple beneficiaries inherit an IRA, it's often a good idea to split it into separate accounts. “This way, each beneficiary can manage their own distributions according to their financial needs and the required rules,” Carlson said.
Individuals named as beneficiaries on your IRA will supersede heirs named in your Will or Trust. For example, if your parent is listed as the beneficiary of your IRA but your spouse is named as the heir in your Will, your parent would receive the funds when you pass away. Why is it important to name a beneficiary?
There are a few things you can do to avoid paying taxes on an inherited IRA. The most obvious thing is to not take a lump-sum distribution. If you inherit the IRA from your spouse, wait until the required minimum distributions begin or take distributions based on your own life expectancy.
An inherited IRA may be taxable, depending on the type. If you inherit a Roth IRA, you're free of taxes. But with a traditional IRA, any amount you withdraw is subject to ordinary income taxes.
Spacing out distributions over 10-year period
A beneficiary may consider spacing out distributions over the ten-year period to benefit from tax-deferred appreciation while also managing taxes. If the beneficiary retires during those years, waiting to take distributions until then may lower the overall tax bill.
Before the Secure Act of 2019, heirs could "stretch" inherited IRA withdrawals over their lifetime, which helped reduce yearly taxes. But certain accounts inherited since 2020 are subject to the "10-year rule," meaning IRAs must be empty by the 10th year following the original account owner's death.
Death and the Traditional IRA
This is true regardless of the IRA owner's or beneficiary's age. However, distributions from an inherited traditional IRA are taxable. This is referred to as “income in respect of a decedent.” That means if the owner would have paid tax, the income is taxable to the beneficiary.
However, this protection only applies to your own retirement account. When people pass away and pass down their retirement funds, those inherited IRAs rarely have the same protections. This means that if your beneficiary goes through bankruptcy, creditors may be able to take the money from that inherited account.
By designating the estate as beneficiary of IRA, these assets become subject to probate. This not only delays the distribution process but also incurs additional expenses and exposes the details of the IRA to the public record.
The rules around inherited IRAs are different for spouse and non-spouse beneficiaries. Non-spouse beneficiaries can open and transfer funds into an inherited IRA, take a lump-sum withdrawal or turn down the inheritance. Spouse beneficiaries can roll the funds into an existing IRA account or open a new account.
Individuals may seek to contest a beneficiary designation on an IRA, life insurance policy, or other account for any number of reasons. However, while it is possible to contest a beneficiary designation, it's crucial to note that this process isn't always cut-and-dry.
It's generally a bad idea to name more than one beneficiary, for two reasons. First, if you name your spouse and someone else as beneficiaries, your spouse loses the special benefits and flexibility they would otherwise have. Second, it complicates things.
What is an inherited IRA? Also sometimes called a beneficiary IRA, an inherited IRA is an account that is opened when someone inherits an IRA after the original owner dies. The beneficiary may be anyone — a spouse, relative, or an estate or trust, for example.
An inherited IRA is considered part of a deceased person's estate. That means that if the estate is large enough, it's possible it will owe estate taxes on the value of an IRA. Estate taxes are assessed on the federal level only on very large estates, but some states impose estate taxes at lower levels.
Under the SECURE Act, the general rule is that funds from an inherited retirement account passed to a designated beneficiary must be distributed within 10 years of the original account holder's death. There are several exceptions to the 10-year rule, however. It doesn't apply to: A surviving spouse.
If the will is contested, litigation costs can be insurmountable. By avoiding probate, you can also keep someone from contesting your wishes altogether. Finally, one of the biggest reasons individuals avoid probate is because they want their financial affairs kept private.
One option is to leave your house to someone in your will. A will names the beneficiary for each item of property and transfers ownership after the probate process. A will can be easy to prepare.
There are many ways to avoid probate, including creating a revocable living trust, understanding property ownership, designating beneficiaries, utilizing transfer on death deeds, and gifting assets.