Ask Terry Questions estate planning – taxes

estate planning – taxes

By Terry Savage on May 27, 2024 | Financial Planning / Retirement

Is it correct that is a child is listed as a beneficiary in a 401(k), IRA or Brokerage investment account, upon death of the account owner, the beneficiary does not pay any federal or state estate taxes?

Terry Says

NO!  Where did you get that idea?

First of all, you cannot name a minor child as a beneficiary of a retirement account.  You’d have to set up a trust as beneficiary.

But assuming you’re talking about an adult child as beneficiary of a retirement account, they must “empty” the account within 10 years — paying ordinary income taxes on the withdrawals from the account.  And if you had already started taking RMDs, they must continue taking those payments on your schedule.

And if your brokerage account is not for an IRA, then you should probably create an estate plan in the form of a revocable living trust, to distribute your non-retirement assets at death.  If you own assets OUTSIDE of a retirement plan (which requires a beneficiary) then there is — under current law — a “step-up” in “basis” — meaning that when your children sell those non-retirement assets, their new cost basis is the value on the date of your death.  If they sell within 6 months of your death, there would be no tax on the inherent capital gains from your original purchase cost.




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