What You Should Know about Inherited IRAs

October 16, 2023

Here’s what you should know about inherited IRAs. Inheriting an Inherited IRA can be even more complicated than the already complex world of inherited Individual Retirement Accounts (IRAs). Understanding the rules and regulations about inheriting an inherited IRA is critical to avoid major tax pitfalls, according to a recent article from yahoo! finance, “What Happens When I inherit an Annuity?”

After the passage of the SECURE Act, the rules concerning inherited IRAs became quite restrictive. Working with an estate planning attorney knowledgeable about IRAs can be the difference between a healthy inheritance or an unexpected huge tax liability.

An inherited IRA is an IRA left to a beneficiary following the death of the original account owner. The beneficiary who inherits the IRA can pass it to a successor beneficiary upon death. This creates the “inheriting an inherited IRA” scenario.

If the line of succession is not set up correctly, there is the potential for inherited assets to go through probate for a judge to rule on the rightful owner.

The original beneficiary is the first person to inherit the IRA. Once they have inherited the account, they may name their successor beneficiary. There are rules for the original beneficiary and the successor beneficiary.

The SECURE Act changed the timeline for inherited IRAs. It eliminated the “stretch” IRA strategy, which allowed beneficiaries to take distributions over their lifetime, stretching out the tax-deferred growth of the IRA over decades. Now, most non-spouse beneficiaries must withdraw all assets from an inherited IRA within ten (10) years of the original account holder’s death. This change presents new implications with regard to taxes, especially if the beneficiary is in their peak earning years.

Inheriting an inherited IRA can involve complex tax rules and pitfalls. There are timelines for taking required withdrawals and zero flexibility for mistakes.

You’ll also need to be sure the inheritance is documented correctly to avoid potential probate.

The rules differ for spouses inheriting an IRA since they shared assets with their deceased spouse. The SECURE Act allows spouses to treat the IRA as their own, providing more flexibility in distributions and potential tax implications.

Understanding the concept of Year of Death Required Distributions is essential. Let’s say the original owner was over a certain age at death. In this situation, a Required Minimum Distribution (RMD) may need to be taken in the year of death, which could impact the heir’s taxes for that year.

Knowing potential tax breaks related to inherited IRAs will also help with financial management. Non-spouse beneficiaries can deduct the estate tax paid on IRA assets when calculating their income tax.

These are complex issues requiring the help of an experienced estate planning attorney. Ideally, the attorney will help you understand what you should know about inherited IRAs. This conversation should occur while creating or revising your estate plan. If you would like to learn more about IRAs, please visit our previous posts.

Reference: yahoo! finance (Sep. 5, 2023) “What Happens When I inherit an Annuity?”

Things that should Never Belong in Your Will

August 8, 2023

Most people don’t enjoy thinking about their mortality. However, creating a will and related estate planning documents makes it much better for loved ones to handle the estate after your passing. Estate planning attorneys know there are certain things that should never belong in your will, says this recent article, “13 Things You Should Never Put In Your Will” from mondaq.

Joint accounts. Accounts owned jointly or with beneficiary designations pass directly to the surviving owner or beneficiary. Putting these items in your will can create confusion and even open the estate to potential litigation.

Personal and private wishes. Don’t use your will to take a stand on family relations or address personal issues from the grave. Settling old scores in a will is a bad idea, as your will becomes a public document, and anyone who wants to can see it.

Business interests for an active business. If your will contains information about a business, it could be easier for the business to function while your estate is being settled. A succession plan and buy-sell agreement are the tools for active businesses, not your will.

Life Insurance. Passing your life insurance policy through a will could lead heirs to lose up to half or a large percentage of estate taxes. Speak with your estate planning attorney about using a life insurance trust instead.

Secure or secret information. Whether personal or business-related, private information will not remain private if it’s in the will. Your will goes through probate and becomes part of the public record, available to prying eyes. Don’t include bank account information, access codes, PIN passwords, keys to crypto, etc.

Significant assets. Even though wills are used to pass assets to heirs after death, this isn’t always the best way to distribute wealth. For instance, if you leave your interest in a business through a will, the court may end up with oversight of their share of the business during probate. Probate also provides a forum for someone to contest their will. Trusts are better tools for leaving assets, since they provide privacy, allow you to dictate highly specific terms and are controlled by a trustee with no court involvement.

Ambiguity. Don’t use vague or general language and expect heirs to figure things out. “I leave my favorite painting to my favorite niece” opens up a world of trouble for the family. The more information you can provide the better. Even if you only have one niece, which is your favorite painting? Similarly, a will directing assets to be left “equally to my two children” won’t work if you’ve welcomed another child into the family.

Assets going through probate when there are other options. Most estate plans are designed to avoid assets going through probate whenever possible. Trusts, beneficiary designations, or gifting while you are living, can simplify distributing assets and avoid probate costs.

Tangible personal property. Jewelry or a valuable art collection should not be bequeathed through a will. These assets may require a professional appraisal, which could delay probate. Instead, assign the property to a trust or leave detailed information outlining how you wish the property to be distributed with the executor.

Funeral and burial instructions. Wills are often read long after funerals have taken place. Your wishes won’t be known or followed. Discuss your preferences with loved ones and document them separately. If you make arrangements in advance with a cemetery and a funeral home, you’ll have the most control over your funeral. Advance planning is a great kindness for your loved ones.

Conditions on gifts and unenforceable conditions. Imposing too many restrictions could complicate your estate and create disputes between beneficiaries. Your wishes will be better set out and made legally enforceable through trusts.

It does not take much to invalidate a will. The things listed above should never belong in your will. Similarly, unenforceable conditions can create controversy and delay the administration of your estate. Discriminatory clauses, illegal actions, or conditions violating a person’s rights can render your entire will or the specific provisions invalid. An experienced estate planning attorney will help you draft a will that is legally sound and secure. If you would like to learn more about wills, please visit our previous posts.

Reference: mondaq (July 10, 2023) “13 Things You Should Never Put In Your Will”

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Important to Evaluate your Planning before a Second Marriage

August 7, 2023

Second marriage, goes the saying, is the triumph of hope over experience. It’s a happy event for everyone, but different from the first time around. You might have created an estate plan during your first marriage. Still, chances are your life is a lot more complicated this time, especially if you both have children from prior marriages and more assets than when you were first starting out as a young adult. It is important to evaluate your planning before a second marriage. This is why a recent article from The Bristol Press is aptly titled “Plan your estate before you remarry.”

Here are some pointers to protect you and your new spouse-to-be:

Take an inventory of all assets and liabilities. This includes assets and debts, life insurance policies, retirement plans, credit card debt and anything you own. It’s important to be open and honest about your debts and assets, so that both people know exactly what they are marrying. Once you are married, you may be liable for your partner’s debts. Your credit scores may be impacted as well.

Decide how you are going to handle finances. Once you know what your partner is bringing to the marriage, you’ll want to make clear, unemotional decisions about how you’ll address your wealth. Are you willing to combine all of your assets? Do you want to keep your investment accounts separate?

For example, if one person is selling a home to move into the home owned by the other person, what costs, if any, will they contribute to the cost of the house? If one person has significant debt, do you want to combine finances or make joint purchases? These are not always easy issues. However, they shouldn’t be ignored.

Decide what you want to happen when you die. You and your future spouse should meet with an experienced estate planning attorney to create a will, Power of Attorney, Health Care Proxy and other documents. This lets you map exactly where you want your assets to go when you die. If there are children from prior marriages, you’ll want to ensure they are not disinherited when you die. This can be addressed through a number of options, including creating a trust for your children, making them beneficiaries of life insurance policies, or giving children joint ownership of property.

Even if there are no children, there may be family heirlooms or items with sentimental value you want to keep in the family, perhaps passing to a cousin, nephew, or niece. Discuss this with your future spouse and ensure that it’s included in your will.

Meet with an estate planning attorney. You should take this step even if you don’t have many assets. If you have children, it’s even more important. You’ll want to update your will and any other estate planning documents. If you have significant assets, you may decide to have a prenuptial or postnuptial agreement. The estate planning attorney will also help you determine whether you need a trust to protect your children.

If you had planning done in the past, it is important to sit down with an estate planning attorney to evaluate it in before to a second marriage. If you would like to learn more about estate planning for blended families, please visit our previous posts.

Reference: The Bristol Press (July 14, 2023) “Plan your estate before you remarry”

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Review Beneficiary Designations after Life Changes

June 29, 2023

Beneficiary designations guarantee that certain assets are transferred efficiently at a person’s passing. Assets with designated beneficiaries transfer automatically to the named beneficiary, no matter what’s in the original asset owner’s will or trust document instructions. It is vital that you review beneficiary designations after major life changes, such as a marriage, birth or death.

Inside Indiana Business’s recent article, “Who are your beneficiaries?” explains that because the new owner is determined without the guidance of a will document, assets with designated beneficiaries are excluded from the decedent’s probate estate. The fewer assets subject to probate, the less cost and time associated with settling the estate.

Many different types of assets transfer via beneficiary designation at the death of the original owner. These include retirement accounts (IRAs, Roth IRAs, 401(k)s, 403(b)s, 457(b)s, pensions, etc.), life insurance death benefits and the residual value of annuities. Bank and brokerage accounts can also be made payable on death (POD) or transferable on death (TOD) to a named beneficiary, if desired. POD and TOD designations bypass probate–like beneficiary designations.

The owners can name both primary and contingent beneficiaries. The primary beneficiary is the first in line to inherit the asset. However, if the primary beneficiary predeceases the owner, the contingent beneficiary becomes the new owner. If there’s no contingent beneficiary listed, the asset transfers to the owner’s estate for distribution. There’s no restriction on the number of beneficiaries who can inherit an asset.

Charities can also be beneficiaries of assets. Because a charity doesn’t pay income tax, leaving a taxable retirement account or annuity to a charity will let 100% of the value go toward the charity’s mission. When an individual inherits, income tax may be due when the funds are distributed.

A trust can also be named beneficiary of an asset. This strategy is often employed when minors or those with disabilities are beneficiaries. Designating a trust as a beneficiary can be complex, so do so with the advice of an experienced estate planning attorney.

Simply naming an estate as a beneficiary is typically not a good strategy because this will subject the asset to probate, which can result in unfavorable income tax outcomes for retirement accounts.

When no beneficiaries are named, the owner’s estate will likely become the default, which leads to probate.

Take time to review your current beneficiary designations to be sure they reflect current wishes. Review these beneficiary designations every five years or after major life changes (marriage, birth, divorce, death).

Whenever you name or change a beneficiary, verify that the account custodian or insurance company correctly recorded the information because errors are problematic, if not impossible, to correct after your death. If you would like to learn more about beneficiaries, please visit our previous posts.

Reference: Inside Indiana Business (June 5, 2023) “Who are your beneficiaries?”

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Use Estate Planning to Prepare for Cognitive Decline

May 18, 2023

Since 2000, the national median age in the U.S. has increased by 3.4 years, with the largest single year gain of 0.3 years in 2021, when the median age reached 38.8 years. This may seem young compared to the life expectancies of older Americans. However, the median age in 1960 was significantly lower, at 29.5 years, according to the article “Don’t Let Cognitive Decline Derail Well-Laid Financial Plans” from Think Advisor. As we get older, it is wise to use your estate planning to prepare for cognitive decline.

An aging population brings many challenges to estate planning attorneys, who are mindful of the challenges of aging, both mental, physical and financial. Experienced estate planning attorneys are in the best position to help clients prepare for these challenges by taking concrete steps to protect themselves.

Individuals with cognitive decline become more vulnerable to potentially negative influences at the same time their network of trusted friends and family members begins to shrink. As people become older, they are often more isolated, making them increasingly susceptible to scams. The current scam-rich environment is yet another reason to use estate planning.

When a person is diagnosed with Alzheimer’s or any other form of dementia, an estate plan must be put into place as soon as possible, as long as the person is still able express their wishes. A diagnosis can lead to profound distress. However, there is no time to delay.

While typically, the person may state they wish their spouse to be entrusted with everything, this has to be properly documented and is only part of the solution. This is especially the case if the couple is close in age. A secondary and even tertiary agent needs to be made part of the plan for incapacity.

The documents needed to protect the individual and the family are a will, financial power of attorney, durable power of attorney and health care documentation. In addition, for families with more sophisticated finances and legacy goals, trusts and other estate and tax planning strategies are needed.

A common challenge occurs when parents cannot entrust their children to be named as their primary or secondary agents. For example, suppose no immediate family members can be trusted to manage their affairs. In that case, it may be necessary to appoint a family friend or the child of a family friend known to be responsible and trustworthy.

The creation of power of attorney documents by an estate planning attorney is critical. This is because if no one is named, the court will need to step in and name a professional guardian. This person won’t know the person or their family dynamics and may not put their ward’s best interests first, even though they are legally bound to do so. There have been many reports of financial and emotional abuse by court-appointed guardians, so this is something to avoid if possible. An experienced attorney will make sure you are using your estate planning to prepare for cognitive decline. If you would like to learn more about elder care planning, please visit our previous posts.

Reference: Think Advisor (April 21, 2023) “Don’t Let Cognitive Decline Derail Well-Laid Financial Plans”

Blended Families face Unique Planning Decisions

May 16, 2023

Blended families are now nearly as common as traditional families. Blended families face unique estate planning decisions, says a recent article, “Considerations For Financial And Estate Planning Professionals Who Work With Blended Families” from Forbes.

Estate planning starts with a will. Naming an impartial executor may require more consideration than in traditional families where the eldest child is the likely candidate. The will also needs to nominate a guardian for minor children and appoint a power of attorney and healthcare proxy in case of incapacity. Traditional wills used to provide instructions for asset distribution may have limitations regarding blended families. Trusts may provide more control for asset distribution.

Wills don’t dictate beneficiaries for life insurance policies, retirement plans, or jointly owned property. However, wills are also subject to probate, which can become a long and costly process that opens the door for wills to be challenged in court.

Wills also become public documents once they are entered into probate. Any interested party may request access to the will, which may contain information the family would prefer to have private.

Trusts allow greater control over how assets are managed and distributed. Their contents remain private. There are many different types of trusts used to accomplish specific goals. For instance, a Qualified Terminal Interest Property Trust (QTIP) can provide income for a surviving spouse, while passing the rest of the assets to a client’s children or grandchildren.

Another type of trust is designed to skip a generation and distribute trust assets to grandchildren or those at least 37.5 years younger than the grantor. Some may choose to use this Generation-Skipping Trust (GST) to keep wealth in the family, by bypassing children who have married.

An IRA legacy trust can be the beneficiary of an IRA instead of family members. This option lets owners maintain creditor protection only sometimes afforded to one who inherits an IRA. The account owner may also want to use an IRA’s required minimum distributions (RMDs) to benefit a second spouse during their lifetime and leave the remainder to their children.

Couples entering a second or third marriage need to be transparent about their expectations of what each spouse will receive upon their death or in the event of divorce and whether or not they agree to waive their right to contest these commitments. A prenuptial agreement is a legal contract spelling out the terms before marriage. For example, in some instances, the prenup requires each spouse to maintain life insurance on the other to ensure liquidity, either from the policy’s death benefit or its cash value.

A final consideration is ensuring that all documentation created is easy to understand, clear and concise. Blended families face unique estate planning decisions. Make sure to spell out the full names of beneficiaries for wills, trusts and life insurance, and include their birthdates, so it is easy to identify them and they cannot be confused with someone else. Estate planning is an ongoing process requiring review regularly to keep the estate plan consistent with the family’s evolving needs and goals. If you would like to learn more about planning for blended families, please visit our previous posts.

Reference: Forbes (April 19, 2023) “Considerations For Financial And Estate Planning Professionals Who Work With Blended Families”

Avoid Unintended Consequences with your Planning

May 11, 2023

The mistake can be as simple as signing a document without understanding its potential impact on property distribution, failing to have a last will and testament properly executed, or expecting a result different from what the will directs. Unfortunately, these unintended consequences are relatively common, says the article “Advice for avoiding unintended issues in estate planning” from The News-Enterprise. You can avoid unintended consequences with your planning by working with an estate planning attorney.

The most common mistake that leads to unintended consequences is leaving everything to a spouse in a blended family. Even if children don’t have a close relationship with their stepparent, they’re willing to get along for the sake of their biological parent. However, when the first spouse dies, the decedent’s beneficiaries are generally disinherited if the surviving spouse receives the entire estate.

If the family truly has blended and maintains close relationships, the surviving spouse may ensure that the decedent’s children receive a fair share of the estate. However, if the relationships are tenuous at best, and the surviving spouse changes their will so their biological children receive everything, the family is likely to fracture.

Using a revocable living trust as the primary planning tool is a safer option. An experienced estate planning attorney can create the trust to allow full flexibility during the lifetime of both spouses. Upon the first spouse’s death, part of the estate is still protected for the decedent’s intended beneficiaries.

This way, the surviving spouse has full use of marital assets but can only change beneficiaries for his or her portion of the estate, protecting both the surviving spouse and the decedent’s intended beneficiaries.

Another common mistake occurs when married couples execute their last will and testaments with different beneficiaries. For example, if they’ve named each other as the primary beneficiary, only the survivor will have property to leave to loved ones.

An alternative is to decide what the couple wants to happen to the estate as a whole, then include fractional shares to all beneficiaries, not just the one spouse’s beneficiaries. This protects everyone.

Many people assume that if they die without a will, their spouse will inherit everything. Unfortunately, this is not always the case, and a local estate planning attorney will be able to explain how your state’s laws work when there is no will. Children or other family members are often entitled to a share of the estate. This may not be terrible if the family is close. However, if there are estranged relationships, it can lead to the wrong people inheriting more than you’d want.

Failing to plan in case an heir becomes disabled can cause life-altering problems. If an heir develops a disability and receives government benefits, an inheritance could make them ineligible. The problem is that we don’t know what state of health and abilities our heirs will be in when we die, and few will want their estate to be used to reimburse the state for the cost of care. A few extra provisions in a professionally prepared estate plan can result in significant savings for all concerned.

Estate planning is about more than signing off on a handful of documents. It requires thoughtful consideration of goals and potential consequences. Can every single outcome be anticipated? Not every single one, but certainly enough to be worth the effort. You can avoid unintended consequences with your planning by working with an experienced estate planning attorney. If you would like to learn more about mistakes in your estate planning, please visit our previous posts.

Reference: The News-Enterprise (March 25, 2023) “Advice for avoiding unintended issues in estate planning”

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Consider these Overlooked Elements in your Planning

April 26, 2023

When creating an estate plan, consider these overlooked elements in your planning. There are details which seem minor but are actually very important, says a recent article from mondaq, “Four Provisions People Often Forget To Include In Their Estate Plan.”

Don’t forget to name alternative beneficiaries and executors. If the will names a beneficiary but they are unable to take possession of the property, or they are deceased, the asset will pass as though you didn’t have a will at all. In other words, the state will determine who receives the property, which may not be in accordance with your wishes. If there’s an alternate beneficiary, the property will go to someone of your choosing. A backup executor is also critical. If your primary executor cannot or does not want to serve, the court may appoint an administrator.

Personal possessions, including family heirlooms. Most families have items with great sentimental value, whether or not they have any financial value. Putting a list in your will makes it very difficult if you want to change your mind over time. It’s best to have a personal property memorandum. This is a separate document providing details about what items you want to give to family and friends. In some states, it is legally binding if the personal property memorandum is referenced in the will and signed and dated by the person making the will. A local estate planning attorney will know the laws regarding personal property memorandums for your state.

Even if this document is not legally binding, it gives your heirs clear instructions for what you want and may avoid family arguments. Please don’t use it to make any financial bequests or real estate gifts. Those belong in the will.

Digital assets. Much of our lives is now online. However, many people have slowly incorporated digital assets into their estate plans. You’ll want to list all online accounts, including email, financial, social media, gaming, shopping, etc. In addition, your executor may need access to your cell phone, tablet and desktop computer. The agent named by your Power of Attorney needs to be given authority to handle online accounts with a specific provision in these documents. Ensure the list, including the accounts, account number, username, password and other access information, is kept safe, and tell your executor where it can be found.

Companion animals. Today’s pet is a family member but is often left unprotected when its owners die or become incapacitated. Pets cannot inherit property, but you can name a caretaker and set aside funds for maintenance. Many states now permit pet owners to have a pet trust, a legally enforceable trust so the trustee may pay the pet’s caregiver for your pet’s needs, including veterinarian care, training, boarding, food and whatever the pet needs. Creating a document providing details to the caretaker concerning the pet’s needs, health conditions, habits and quirks is advised. Make sure the person you are naming as a caretaker is able and willing to serve in this capacity, and as always, when naming a person for any role, have at least one backup person named.

Make sure your consider these overlooked elements in your planning. Discuss all of your options carefully with an experienced estate planning attorney. If you would like to learn more about drafting an estate plan, please visit our previous posts.

Reference: mondaq (March 16, 2023) “Four Provisions People Often Forget To Include In Their Estate Plan”

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‘When’ play Major role in Retirement

April 19, 2023

When do you plan to retire? When will you take Social Security? When must you start withdrawing money from your retirement savings? “When” plays a major role in retirement, says Kiplinger’s recent article entitled, “In Retirement, Many Crucial Questions Start With the Word ‘When’.” That’s because so many financial decisions related to retirement are much more dependent on timing than on the long-term performance of an investment.

Too many people approaching retirement — or are already there — don’t adjust how they think about investing to account for timing’s critical role. “When” plays a major role in the new strategy. Let’s look at a few reasons why:

Required Minimum Distributions (RMDs). Many people use traditional IRAs or 401(k) accounts to save for retirement. These are tax-deferred accounts, meaning you don’t pay taxes on the income you put into the accounts each year. However, you’ll pay income tax when you begin withdrawing money in retirement. When you reach age 73, the federal government requires you to withdraw a certain percentage each year, whether you need the money or not. A way to avoid RMDs is to start converting your tax-deferred accounts to a Roth account way before you reach 73. You pay taxes when you make the conversion. However, your money then grows tax-free, and there is no requirement about how much you withdraw or when.

Using Different Types of Assets. In retirement, your focus needs to be on how to best use your assets, not just how they’re invested. For example, one option might be to save the Roth for last, so that it has more time to grow tax-free money for you. However, in determining what order you should tap your retirement funds, much of your decision depends on your situation.

Claiming Social Security. On average, Social Security makes up 30% of a retiree’s income. When you claim your Social Security affects how big those monthly checks are. You can start drawing money from Social Security as early as age 62. However, your rate is reduced for the rest of your life. If you delay until your full retirement age, there’s no limit to how much you can make. If you wait to claim your benefit past your full retirement age, your benefit will continue to grow until you hit 70.

Wealth Transfer. If you plan to leave something to your heirs and want to limit their taxes on that inheritance as much as possible, then “when” can come into play again. For instance, using the annual gift tax exclusion, you could give your beneficiaries some of their inheritance before you die. In 2023, you can give up to $17,000 to each individual without the gift being taxable. A married couple can give $17,000 each.

Take the time to discuss your retirement goals with your estate planning attorney. He or she will help you understand how the “when” in your planning plays a major role in retirement. If you would like to learn more about retirement planning, please visit our previous posts.

Reference: Kiplinger (March 15, 2023) “In Retirement, Many Crucial Questions Start With the Word ‘When’”

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Take Care when using a Self-Directed IRA

March 29, 2023

For some people, a self-directed IRA could be a great vehicle in which to invest tax-advantaged retirement funds in real property. However, there are rules governing everything from property ownership and usage to how you cover expenses and take profits. If they aren’t followed, you can easily run afoul of the IRS. Take care when using a self-directed IRA.

Forbes’ recent article entitled “How To Use A Self-Directed IRA For Real Estate Investing” explains that a real estate IRA is just another name for a self-directed IRA that’s designed to hold investment property. You can own a wide range of property types in a real estate IRA. This includes land, single and multi-family homes, international property, boat docks, commercial properties and more. Because this is a type of self-directed IRA, the custodian—the company safeguarding your account and enforcing IRS regulations—allows you to hold alternative asset classes, like real estate.

First, find a custodian that allows or even specializes in real estate IRAs. Next, you need to fund your account—typically with a rollover from an existing IRA. With your cash in place, you can buy real estate and have it titled in the name of your IRA. You can finance real estate in your IRA with an investment property-specific mortgage. You can then pay the mortgage using additional cash from your self-directed IRA. When you sell a property held in a real estate IRA, the funds stay in the account. Depending on the type of IRA you’ve selected, those funds grow tax-deferred (traditional IRA) or tax-free (Roth IRA).

A real estate IRA allows you to diversify away from stocks and bonds. However, there are many rules governing this specialized type of account. Let’s look at some of the key rules you must know:

Property Title. Real estate that is held in a self-directed IRA is owned by the account, rather than by you personally. Therefore, the title documents that confirm ownership of the property are in the name of your IRA, rather than in your name.

Expenses and Income. All expenses and income flow into and out of your real estate IRA. All property taxes, utility bills and other expenses are paid by your account. All rental income or other income is paid back into your account.

Limitations on Use. Real estate held in a self-directed IRA can only be an investment property. You and any member of your family—plus any of your beneficiaries or fiduciaries—are referred to as disqualified persons. Since the purpose of an IRA is retirement investing, these disqualified persons can’t make use of the real estate assets.

No DIY. If you need to fix up or repair property held in a real estate IRA, the account must pay for the work. It can’t be performed by a disqualified person (you).

Prior Property Ownership. You can’t sell, lease, or exchange property you already own to your real estate IRA. That’s called “self-dealing,” which the IRS strictly prohibits.

Watch Out for the UBIT. If you take out a loan that’s secured by the property itself (a non-recourse loan), you will be required to pay unrelated business income tax (UBIT) on any profits related to the financed portion. However, you can use depreciation and operating costs to reduce your tax bill, which can allow you to reduce your UBIT or eliminate it altogether.

A self-directed IRA can be a wonderful tool to utilize retirement funds for real estate, but take care when using it. If you would like to learn more about retirement accounts and estate planning, please visit our previous posts.

Reference: Forbes (Feb. 13, 2023) “How To Use A Self-Directed IRA For Real Estate Investing”

Category: Retirement Accounts

What You Should Know about Inherited IRAs

Things that should Never Belong in Your Will

Important to Evaluate your Planning before a Second Marriage

Review Beneficiary Designations after Life Changes

Blended Families face Unique Planning Decisions

Avoid Unintended Consequences with your Planning

Consider these Overlooked Elements in your Planning

Take Care when using a Self-Directed IRA

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