Estate Planning for Your Home and Your IRAs

For many clients today, their homes and IRAs represent their biggest assets. And both require special care and handling when leaving them to loved ones as part of an estate. Real estate passes per title on a deed and IRA assets pass to those designated in a beneficiary designation form. These assets only pass under a will if there is no joint name on a deed and no beneficiary designation form for an IRA.


Often when people come in for an estate planning consultation, they believe that if they write a will, all of their assets pass per instructions under a will. This is not true. Many assets pass by what is known as “operation of law.” For example, if you own property jointly with a spouse or other co-owner, the surviving spouse will inherit the property based on what the deed says. The will has no part in this transfer.

A home is often placed in trust, to avoid probate or to plan for Medicaid eligibility. If your home is highly appreciated in value, the important thing to remember is to not give the home away while you’re alive. If you do, the person you give it to will have to pay capital gains on the built-in appreciation. For example, let’s say the home cost you $30,000 and is worth $750,000. If the property remains appreciated when it is sold, the gift recipient will pay between $75,000-$150,00 in capital gains taxes, under present law. However, if that person inherits the property, from you or a living trust, that appreciation escapes tax…

IRAs will only pass under your will if you leave it to your estate or do not name a beneficiary. Most people name a beneficiary on a beneficiary designation form so that the IRA will go to that person, and often can be rolled over. Whoever inherits an IRA will

pay income taxes on funds withdrawn from an inherited IRA. However, continued tax deferral is still available for assets that remain in the inherited IRA. Often the goal is to stretch the pay-out period as long as possible to maximize tax-free deferral on appreciation and reduce income taxes by planning the timing of the withdrawals. These are both important planning opportunities, particularly for a surviving spouse.

Special rules permit a spouse and other beneficiaries to take IRA withdrawals out over their life expectancies. A properly drafted trust may also be named as a beneficiary to permit continued deferral of IRA assets. And while these tax deferral benefits are substantial, the rules are complex and if you plan to leave these assets to other than a spouse, take the time to create the proper trust or fill out the beneficiary designation form to get the result you want.

According to a study by TD Ameritrade and Pershing, LLC, two of the largest IRA custodians, most people withdraw an inherited IRA within two years of the original owner’s death. This is often a waste of tax deferral opportunities unless a beneficiary truly needs liquid funds at once. Even if cash is needed, since withdrawals from regular inherited IRAs are subject to income tax, it makes sense to spread a withdrawal over time if it can produce a lower income tax bill for each year that a withdrawal is made, depending on the beneficiary’s other tax deductions and income items.