Everyone I meet with about Estate Planning in our Fishers office wants to know about how they can give more money to their children without it passing through probate (without it going to Court, paying more attorney fees and court costs, and dragging it on for months).  For many, we suggest a Testamentary Trust funded with life insurance, but for some, especially if you are not insurable, you can also consider passing an IRA or your Roth IRA but there are some caveats which you need to know if you are considering this option.

To avoid Penalties for an early withdrawal, still paying tax at their income level for each of these methods, the child must exercise one of three options:

  1. Take a lump sum distribution – all the money at once (Box 7 should be marked with “4” on the 1099-R)
  2. Take as much as they want in any amount of distribution as long as the account is empty by the end of the 5th tax year after the year of death, or
  3. Structure distributions over the child’s life expectancy.

If you want to choose the structured option (#3), the first distribution must be made by December 31 in the year after original account holder’s death.  There is a minimum amount that must be taken but the balance in the account can continue to grow and earn interest. This can be done even if you plan to pass the account to multiple children by establishing multiple inherited accounts upon death and these distributions can be received by the children even before they are 59 ½ years old.  They still pay regular tax rates but the penalties for early withdrawal are eliminated.

If this is an option you would like to consider, please call us at 317-671-8150 to set an appointment to see one of the attorneys at Cogswell and Associates at our Fishers location just east of I-69 on 116th Street.

The information on this website is for general information purposes only. Nothing on this site should be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or viewing does not constitute, an attorney-client relationship.