Michigan residents might have seen in the news that there may be changes to the law regarding inherited individual retirement accounts, or IRAs. The U.S. Senate Finance Committee Chairman, Max Baucus, has proposed stricter requirements for the transfer of IRA assets to beneficiaries. For now, however, the chairman said he would pull back from trying to officially alter the law.
The proposal, if passed, would result in considerable changes to current estate planning practices. In particular, the law would require younger beneficiaries to pay taxes on IRA inheritances over the span of five years, rather than paying those taxes over the course of an heir's remaining lifetime. The chairman's proposal aims to end a popular tax-planning technique that lets many Michigan residents build up tax-deferred gains inside IRAs.
Presently, the law allows the holder of an inherited IRA to receive taxable distributions over the span of his or her anticipated lifetime. But Senator Baucus claims the law is being abused by people who give tax-free benefits to younger generations. If the changes are made, it is estimated that the U.S. Treasury would receive $4.6 billion over the course of the next decade.
The proposal, which would apply to individuals who become deceased in 2013 or after, also includes some exceptions for chronically ill or disabled individuals. Exceptions are also made for an IRA owner's spouse and for beneficiaries within 10 years of age of the account owner. Children would also be exempt from the five-year rule until adulthood.
IRA owners and beneficiaries in the Detroit area may want to know exactly how the new proposal might affect their accounts. If the proposal moves forward into law, estate planning techniques will be considerably altered, and knowing exactly how to navigate the new system will be important for anyone who is concerned with preserving assets and avoiding probate.
Source: Bloomberg, "Sen. Baucus Eyes Inherited IRAs for $4.6B," Richard Rubin, Feb. 7, 2012