02/18/17. Attorney Tony Yu, President of Taiwanese American Lawyers Association Organizes 10-Lawyer Panel for Community Legal Seminar
An IRA can be a powerful wealth-building tool, offering tax-deferred growth (tax-free in the case of a Roth IRA), asset protection and other benefits. But if you leave an IRA to your children — or to someone else other than your spouse — these benefits can be lost without careful planning.
“Inherited IRA” stretches tax benefits
Surviving spouses who inherit IRAs are permitted to roll them into their own IRAs, allowing the funds to continue growing tax-deferred or tax-free until they’re withdrawn in retirement or after age 70½. Beneficiaries other than your spouse, such as your children, are treated differently.
To take full advantage of an IRA’s tax benefits, nonspouse beneficiaries must transfer the funds directly into an “inherited IRA.” Although the beneficiaries will have to begin taking distributions by the end of the following year, they’ll be able to stretch those distributions over their life expectancies, allowing earnings to grow tax-deferred or tax-free as long as possible.
Your children or other nonspouse beneficiaries won’t have this option, however, unless you name them as beneficiaries (or secondary beneficiaries) of your IRA. If you leave an IRA to your estate, your children or other heirs will still receive a share of the IRA as beneficiaries of your estate, but they’ll have to withdraw the funds within five years (or, if you die after age 70½, over what would otherwise be your remaining actuarial life expectancy).
If you name multiple nonspousal beneficiaries (several children, for example), they’ll have to establish separate inherited IRA accounts by the end of the year after the year of your death in order to take distributions over their own life expectancies. If they miss the deadline, they’ll have to use the oldest beneficiary’s life expectancy.
Be aware that, unlike other IRAs, inherited IRAs aren’t protected from creditors in bankruptcy.
Inherited IRA rules
The following special rules apply to an inherited IRA:
Sharing your wealth with a favorite charity can benefit those in need and reduce your taxable estate. In addition, your donations can ease your income tax liability. But you must meet IRS substantiation requirements. If you fail to do so, the IRS could deny the corresponding deductions you’re claiming. Let’s take a look at the requirements for different asset types.
Generally, you can substantiate gifts of less than $250 with a canceled check, written receipt or other reliable record (such as a credit card statement) that indicates the name of the charity and the amount and date of your gift.
If you donate more than $75 in exchange for goods or services other than intangible religious benefits (such as admission to religious ceremonies), the charity must provide you with a statement that 1) advises you that your deduction is limited to the amount by which your gift exceeds the value of those goods and services, and 2) provides a good-faith estimate of that value.
Gifts of $250 or more require a “contemporaneous” written acknowledgment from the charity that includes the amount and date of your gift and the estimated value of any goods or services you received or a statement that no goods or services were received. If goods or services received consisted entirely of intangible religious benefits, a statement to that effect must be included. An email will suffice.
To satisfy the contemporaneous requirement, you must have the acknowledgment in your possession before you file your income tax return. If you file later than the extended due date of your return, you must have received the acknowledgment by that extended due date.
If you make noncash gifts totaling more than $500 for the year, you must file Form 8283, “Noncash Charitable Contributions,” with your federal income tax return. And for gifts of property valued at more than $5,000 ($10,000 for closely held stock) you’ll need to obtain a “qualified appraisal” by a “qualified appraiser” and have the appraiser sign Sec. B, Part III, “Declaration of Appraiser.” If property is valued at more than $500,000, you’re required to attach a copy of the appraisal report to your return. No appraisal is required for publicly traded securities, regardless of value.
A qualified appraiser is a professional who meets certain education, experience and accreditation requirements. A qualified appraisal must 1) be prepared, signed and dated by a qualified appraiser other than the taxpayer or the recipient of the donation, 2) be conducted within 60 days of the gift, 3) provide certain information about the property, the appraiser and the valuation methods used, and 4) not involve fees based on a percentage of the appraised value or deduction amount.
Don’t leave it to chance
If you’ve made substantial charitable donations, their deductibility depends on compliance with IRS substantiation rules. Contact us to ensure you’ve properly substantiated your donations and can maximize your deductions on your 2016 income tax return.