How to prepare your heirs for the $68 trillion ‘great wealth transfer’

We are entering the largest wealth transfer in history.

Over the next 25 years, according to a report from research firm Cerulli Associates, 45 million U.S. households will pass a mind-boggling $68 trillion to their children — the biggest generational wealth transfer ever.

Individual retirement accounts alone in the U.S. held more than $9 trillion in assets at the beginning of last year, according to the Investment Company Institute’s 2018 Investment Company Fact Book. To that point, many Americans are inheriting substantial wealth from their parents through IRAs. But mistakes in handling these accounts could result in needlessly losing much of this wealth to taxes. In order to increase the chances of a successful wealth transfer, it’s important to understand the proper steps to follow.

Any mistakes in handling inherited IRAs can incur hurtful taxes. To avoid these errors, heirs should have a thorough understanding of rules, preferably with the help of a qualified tax professional. Otherwise, they could end up paying an unexpectedly large portion of this inheritance to Uncle Sam and prematurely losing the main benefit of these accounts: long-term tax-deferred asset growth.

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The rules for non-spouse beneficiaries are more restrictive than those for spouses. Common errors by non-spouse heirs of traditional IRAs include:

  • Taking cash out too soon or under the wrong circumstances can invalidate these accounts and make withdrawals taxable as ordinary income. (For single individuals or heads of households, this tax rate is 37 percent for incomes greater than $500,000.) To avoid this hit and keep these accounts valid as tax-deferred, heirs should be careful not to touch them before transferring them directly into accounts created expressly and solely for this purpose.
  • Titling inherited IRA accounts incorrectly will be costly. These accounts must be titled with precise wording that designates them as being inherited, stating the name and date of death of the benefactor. Thus, it’s clear from the title that rules for inherited IRAs apply. Transfers shouldn’t be executed until the new account is correctly set up and titled.

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