How to determine inheritance if the intended beneficiary is deceased

How to determine inheritance if the intended beneficiary is deceased

When a beneficiary is deceased, who will get the inheritance? You may be wondering whether if you leave property to your brother Jim, but he dies before you, would his kids inherit the property in his place? The answer is, only if your will explicitly states as much. To ensure your document is correct, it’s best to say so specifically in various particular ways.

The surest way is to word your will or trust like this: “To my brother Jim, but if he predeceases me, then to his surviving children [insert their full legal names], or to their heirs, __________.” The blank line shows another critical choice which we can discuss in more detail during a consultation.

If you haven’t explicitly worded your documents like that – for example, if your will or trust says “to my brother Jim,” but he has died first, and there’s no mention of his children – then the answer may become unnecessarily complicated. The gift would likely be saved for his immediate family, thanks to “anti-lapse” laws that all states have on the books, but it’s safer not to rely on those laws. Things might get complicated fast, especially if your brother’s family is a “blended” one with numerous stepchildren.

Attorneys Can Help Ensure Your Will or Trust be Established Correctly

Ensure that your will or trust will work the way you want it to with the best solution, a lawyer. We help families with their estate planning needs and would be honored to meet with you.

It’s important to remember that estate planning is not “one and done.” You should at least review your plan every year or two (or sooner if you or a loved one’s health or life circumstances change) to account for any changes in the lives of your beneficiaries or if your goals have changed (sometimes referred to as “major life-changing events”). Some of the events could be the birth of another beneficiary or death of a designated fiduciary (trustee or executor) that was supposed to outlive you, sudden terminal illness, purchase or sale of real property, or moving to another state.

If you have questions or would like to discuss a personal legal matter, don’t hesitate to reach out. Please contact our office at (212) 920-6371.

How to determine inheritance if the intended beneficiary is deceased

It’s not easy when a loved one dies. Not only are you dealing with the grief associated with the loss of your family member, but you are likely dealing with probate issues as well. This is especially true if one of your beneficiaries dies before they can receive an inheritance. Such a situation can lead to complicated matters with wills, trusts, transfer on death (TOD) accounts, payment on death (POD) accounts and life insurance policies. This is because you can’t leave assets to a person who is no longer alive. Depending on when the beneficiary dies, there are several situations that can occur under Florida law.

If a person dies after their beneficiary, the person should take steps to name new beneficiaries right away. Having secondary beneficiary designations is always a good idea to prevent such a situation from occurring. In the event that there are no living beneficiaries, life insurance policies, TOD and POD accounts will go to the decedent’s estate. This will require that the estate go through the probate process.

A gift to a deceased beneficiary will go away, or lapse, unless it is protected under Florida’s anti-lapse statutes. If it lapses, it becomes part of the deceased’s estate. The state’s anti-lapse provisions state that a gift will not lapse if the beneficiary has died and was a descendant of a grandparent. In that situation, the assets go to the lineal descendants of the deceased beneficiary, such as children and grandchildren.

Another possible situation is that the beneficiary could die after the person making the gift from whom they will inherit, but before distribution. If the beneficiary outlives the person creating the estate plan, but dies before receiving the gift, the gift will go to the probate estate of the deceased beneficiary. It will then go to the appropriate heirs. If there is no will or trust, then Florida’s intestacy laws will apply. This will delay the deceased beneficiary’s probate and distribution process.

If the beneficiary dies after receiving the gift, it becomes the property of the deceased person’s estate when they die. This can be a complicated matter because if you will your money to your child, and your child is married, their spouse will receive your money upon their death. Maybe that’s not something you want. To prevent this, you’ll need to get a trustee involved. Finding a person to be around to take care of this situation can also be difficult. You’ll have to have one or more backup trustees in place to make this work.

Seek Legal Help

When a beneficiary dies during the probate process, things can get much more complicated. The laws vary by state as well, so make sure you hire an experienced lawyer to guide you through the process.

How Long Does It Take to Settle an Estate?

How to determine inheritance if the intended beneficiary is deceased

How to determine inheritance if the intended beneficiary is deceased

How to determine inheritance if the intended beneficiary is deceased

How to determine inheritance if the intended beneficiary is deceased

Unfortunately for beneficiaries, handing out inheritances is the very last thing the executor or personal representative of a probate estate will do. The same goes for the successor trustee of a trust. These individuals must take several steps before an estate or trust can be closed, from valuing assets to paying any taxes due.

Inventorying the Decedent’s Documents and Property

All the deceased’s estate planning documents and other important papers must be located before a personal representative or an executor can be appointed by the probate court, or before a successor trustee can take over the administration of a trust.

The decedent’s estate-planning documents can include a last will and testament, funeral, cremation, burial or memorial instructions, or a revocable living trust.

Important papers include bank and brokerage statements, stock and bond certificates, life insurance policies, car and boat titles, and deeds. Other information requested may be related to the deceased’s debts, including utility bills, credit cards, mortgages, personal loans, medical bills, and funeral expenses.

The probate court will then officially appoint the executor if probate is necessary and when the will is submitted to the court. A petition must also be filed to open probate if the decedent didn’t leave a will. The successor trustee can now accept the appointment without probate court involvement if the deceased left a living trust.

A delay of up to two weeks is common from the date of death until probate is officially opened in some states. For example, a New Jersey court cannot accept a will for probate until 10 days have passed since the date of death. Anyone who wants to object to the will can do so during this time.

Valuing the Decedent’s Assets

Next, the date-of-death values of the deceased’s assets must be determined. Most state probate courts require the filing of a comprehensive list of all property owned by the decedent along with corresponding appraised values.

This is additionally important information for the beneficiaries. Any capital gains tax will be calculated using these date-of-death value should a beneficiary decide to sell an inheritance.

This is referred to as a step-up in basis, and it’s a good thing. Otherwise, any capital gains tax would be based on the difference between the sales price and whatever the decedent paid to purchase the asset, which could be a great deal more.

The total value of the deceased’s assets also determines whether it will be liable for state estate taxes and/or federal estate taxes after subtracting the decedent’s outstanding debts, certain gifts such as those made to spouses or charities, and costs of administering the estate.

Paying the Decedent’s Final Bills

The deceased’s final bills, creditors, and ongoing administration expenses must be paid before the probate estate or trust can close and transfer the remaining assets to beneficiaries. This occurs after the value of the deceased person’s assets has been established and, in the case of a probate estate, after the list has been supplied to the court.

Estate executors are required to notify all potential creditors of the deceased, both those they know about and those they might not be aware of. This is typically achieved with a newspaper notice, alerting creditors to the death and instructing them how to make claims to the estate for the money they’re owed.

This published notice is typically in addition to written notice made to known creditors.

Creditors then have a prescribed period of time to make claims, depending on state law, but it can run simultaneously with the inventory period in some states.

The executor has the right to decide whether claims are valid and whether they should or should not be paid. Denying claims can result in numerous court hearings where a judge will ultimately decide, and all of this can eat up a lot of time. For example, in Washington, creditors have 30 days to file a suit against a rejected claim and that could slow down the process of closing the estate.

The decedent’s final bills will probably include cell phone bills, credit card bills, and medical bills, as well as the ongoing expenses of administering the estate or trust, such as storage fees, utilities, and attorney’s fees. Any mortgages and other secured debts must also be resolved.

Tax Returns and Applicable Taxes

The executor of the probate estate or the successor trustee must also file all necessary federal and state estate tax returns, inheritance tax returns, the decedent’s final income tax returns, and estate or trust income tax returns.

Of course, any taxes that are due must be paid in a timely manner to avoid interest and penalties. When estates owe estate taxes, they typically can’t close until receiving written approval from the IRS or the state taxing authority.

Distribute What’s Left to Beneficiaries

Finally, the executor or successor trustee will distribute inheritances to the beneficiaries. This is the very last step, because executors and trustees can potentially be held personally liable for the deceased’s unpaid bills, administrative expenses, and all unpaid taxes if they fail to take care of all the prior steps first.

When Can You Expect Your Inheritance?

How long the settlement process takes depends on many factors, including the types of assets the decedent owned, the value of those assets, whether the estate is taxable at the state and/or federal level, how many beneficiaries are involved, and the skills and diligence of the executor or successor trustee.

A simple estate or trust can often be settled within a few months, while a complicated estate or trust can take a year or more to close.

Disclaimer: This article is not intended to be construed as legal advice. Prior to making any significant decisions relative to its content, you should consider seeking the advice of a licensed attorney who specializes in estate law for your particular state.

Frequently Asked Questions (FAQs)

Who inherits the money if there is no will?

If you die without a will, your assets will be divided according to the laws in the state where you lived. Most places designate your spouse or children as your heirs-at-law if you don’t have a will. If you have no living spouse or children, your next-of-kin might be your grandchildren, parents, siblings, or grandparents. If you have no heirs-at-law, your money would revert to the state.

How much is the inheritance tax?

Whether you will pay inheritance tax depends on where you live. Six states—Nebraska, Iowa, Kentucky, Pennsylvania, New Jersey, and Maryland—have inheritance taxes, ranging from 0% to 18%, depending on the size of the inheritance. There’s no federal inheritance tax, but the federal estate tax ranges from 18% to 40% for estates valued at over $12.06 million after credits and deductions.

What is a beneficiary?

A beneficiary is named in a Will or through the laws of intestacy as the recipient of a gift (cash or possession) or an inheritance from the testator’s estate.

A testator can choose whomever they wish to be a beneficiary of their estate this includes family, members, friends, organisations, and charities. If the deceased did not have a valid will then the beneficiaries of their estate or decided through the laws of intestacy.

Beneficiaries have certain rights that are protected by law this is to help ensure that the estate is distributed according to the testator’s wishes.

What happens when there is a predeceased beneficiary?

When a beneficiary passes away before the testator their benefit from the estate will Lapse. This means that their death has rendered their gift void. In this circumstance, the share of the estate that they would have received will be returned and become a part of the residual estate which will be distributed amongst the estates Residual beneficiaries.

There are certain exceptions to this rule, the most of common is applicable when the predeceased beneficiary was a direct descendant of the testator. If a gift in a will is made to a person’s lineal descendant (child or grandchild for example) their inheritance will not lapse if the named descendant has surviving children at the time of the testator’s death. (The Wills act/ s33) This does not apply when the gift that the predeceased issue was given was a life interest.

The other most common exception to the Lapse rule is when the testator makes alternative provision in their will for the circumstances in which a beneficiary has predeceased them. This means the lapse rule does not apply as the testator has provided direction for what to do with a predeceased beneficiaries share. There are different ways of expressing this under the terms of a will. Some examples are “in the circumstances that one of my named beneficiaries was to predecease me their share of my estate should be redirected to (name of alternative beneficiary)” or “my children, those who are alive at the time of my death, shall inherit.” This clarifies that the surviving children will inherit and not the children (or Issue) of any predeceased children.

What happens if a beneficiary dies after the testator but before they inherited?

When a beneficiary dies after the testator but before the completion and distribution of the estate the deceased’s beneficiary’s estate will still inherit their share. The assets that are inherited to their estate will be treated as their own and will be distributed according to the wishes in their will or if they had no will the laws of intestacy.

It is possible to have a clause written into a will, known as a survivorship clause, to account for the circumstance of a beneficiary passing away during the estate administration. This clause allows the testator to dictate where the assets should be redirected in this eventuality. This clause can state a set amount of time that a beneficiary must survive them in order to inherit; this time period is normally 28 days.

Similarly, to the survivorship clause, an inheritance can be subject to certain conditions for example that a person must reach a certain age in order to inherit. If this requirement is not met, for example, if the beneficiary was to pass away before reaching the specified age, their estate cannot claim the benefit upon their death.

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How to Make a Weighted List for Estate Disbursal

If you die leaving behind property and heirs, your heirs generally stand to inherit your property. When an heir predeceases you, however, how your property gets distributed is dependent on specific laws. Laws about inheritances differ considerably among states, so consult an attorney if you need legal advice about predeceased heirs and inheritances in your state of residence.

Intestacy

If you die, the laws of your state automatically determine who inherits your property unless you created a valid last will and testament. These laws, known as intestacy laws or laws of intestate succession — i.e., laws governing inheritance in cases where there is no will — predetermine not only who your heirs are but how much they stand to receive.

Per Stirpes

In some states, intestate estates pass to heirs in a manner known as “per stirpes.” In per stirpes states, all children of an intestate parent stand to inherit from the parent after his death. If a child predeceases the parent, that child’s own children receive the portion of the estate the child would have received if she were still alive. For example, if a parent had four children and dies intestate, each of the four children receives a quarter of the estate. If, however, one of the children predeceased the parent, that child’s own children divide the one quarter of the estate among themselves.

Per Capita

In some states, intestate estates pass to heirs “per capita” instead of per stirpes. In a per capita succession state, heirs stand to receive the portion of the decedent’s estate that the predeceased heir would have received. For example, if a woman has three children and one child predeceased her in death, only the surviving children are entitled to inherit the estate property. Each child, in this scenario, receives half of the estate, instead of receiving a third of the estate with the remaining third going to the children of the predeceased child.

Wills

A person can choose his own heirs by creating a last will and testament. A person who creates a will is generally known as a testator. If a person creates a will, leaves property to an heir and that heir predeceases the testator, the terms of the will determine who receives the property the heir would have received. For example, a testator can choose to leave the property to an heir or her offspring, in which case the offspring receive the portion the heir would have received.

  • Cornell University Law School Legal Information Institute: Per Capita
  • Cornell University Law School Legal Information Institute: Pure Per Stirpes
  • Justia: 2010 Arkansas Code section 28-9-205 — Per stirpes distribution

Roger Thorne is an attorney who began freelance writing in 2003. He has written for publications ranging from “MotorHome” magazine to “Cruising World.” Thorne specializes in writing for law firms, Web sites, and professionals. He has a Juris Doctor from the University of Kansas.

What determines the inheritance of marital assets after divorce?

Whether inherited money or property is part of the marital asset pool is an important question as it determines how inherited money, property or other assets are divided after separation or divorce. The Family Courts will determine this, and will take a number of factors into consideration.

Some of the factors the Court may consider include:

How long ago was the inheritance received?

If a long time has passed between the inheritance and the separation, the asset is more likely to be treated as part of the family assets and divided between the parties. If the inheritance occurred close to, or during, separation it is much more likely that the Family Court will allow you to keep your inheritance and it not be put in the pool of marital assets to be divided.

What were the intentions of the deceased?

If the deceased had specific intentions for how the beneficiary should use the inheritance, then this may be relevant to how it is divided after separation. For example, if the deceased intended the inheritance to benefit the whole family, not just the named beneficiary then the inheritance will more than likely be considered part of the marital assets.

Who helped care for the deceased?

If the spouse or partner of the beneficiary helped care for the deceased this will also be taken into consideration. For example, if the deceased lived with the family, then it is more likely that the assets will be treated as belonging to the family and therefore be part of the marital assets.

Every case is different, and there may be many factors in your situation that will need to be taken into account.

If you are worried about where you stand in a family law property division or to find out what steps to take next call into our office and talk to a family law expert at Dawson & Gardiner. Phone: 02 4954 8666.

Whether you’re married or in a de facto relationship, separating from your partner is never easy. And when it comes to dividing the property and assets, things can go from bad to worse.

Everyone wants to protect their own interests, so disagreements about how to divide assets occur very often. When you have property that you wish to keep, such as an inheritance you have received, you need to know where you stand legally.

Every case is different, but here is our guide to what can happen to your inheritance when you separate from your partner or spouse.

Get a free phone consultation for your legal matter. Find out what’s involved.

Can you keep your inheritance if you get divorced?

It is possible that you will be able to keep inheritance that you received while married when you get divorced, but it will depend on your circumstances.

One way you can keep your inheritance is to come to an amicable agreement with your former spouse about how to divide the marital assets. This will likely require some negotiation and compromise from both parties, and you can formalise the agreement by applying for consent orders through the Family Court or signing a Binding Financial Agreement with lawyers.

If you cannot come to an agreement, then it will be up to the Court to determine whether or not your inheritance is considered part of the pool of marital assets to be divided or whether it is solely your property.

In most cases, only one member of a couple is named as a beneficiary of the Will of the deceased party, who is often a parent or other family member. It is also very common for the funds to be used for the betterment of the family, such as house renovations, holidays or even just bills and household expenses. When this is the case, the Court will often count the inherited asset as a contribution to the marriage made by the person who inherited it, so it would not necessarily be returned to them when the marital assets are divided.

On the other hand, if the beneficiary took steps to quarantine their inheritance from the rest of the family assets, the Court will be more likely to recognise this and allow them to keep the inheritance. This means that the inherited asset can not be used for the betterment of the family, and family assets cannot be used for the betterment or management of the inherited asset.

In the rare case where an inheritance is clearly given to both member of a couple, it is likely that the asset will be part of the general pool of assets to be divided between the parties.

How to determine inheritance if the intended beneficiary is deceased

More questions about Wills and Estates?

Find out more about Will and Estate legal services or read some of our other articles:

Is your inheritance part of your marital assets?

Whether the inheritance will be treated as part of your marital assets or separate will depend on your situation. Some of the factors that the Court may consider include:

  • Time since the inheritance – If a long time has passed between the inheritance and the separation, the asset is more likely to be treated as part of the family assets.
  • The intentions of the deceased – If the deceased had specific intentions for how the beneficiary should use the inheritance, then this may be relevant to how to how it is divided. For example, they may have intended the inheritance to benefit the whole family, not just the named beneficiary.
  • Who helped care for the deceased – If the spouse of the beneficiary also helped to care for the deceased, for example if the deceased lived with them, then it’s more likely that the assets will be treated as belonging to the family.

Every case is different, and there may be unique factors in your case that will be taken into account.

How are marital assets divided?

How to determine inheritance if the intended beneficiary is deceased

Child custody arrangements will be decided by the Court if you cannot agree with your former spouse.

If you and your former spouse cannot agree on how to divide your marital assets , including inheritance you have received, you will normally need to attend family dispute resolution before Court proceedings can take place. Coming to an agreement before going to Court is the best way to minimise the emotional and financial stress involved.

If coming to an agreement is impossible, then you can apply for property orders through the Courts. There is no formula for how a judge will decide to divide the asset; they will decide what is just and equitable when all the evidence and unique facts about your case have been heard.

If your inheritance was of particular sentimental importance to you, it is possible that the judge will take this into consideration. Some of the other factors they will consider include:

  • Financial contributions to the marriage made by each party, both direct and indirect.
  • The responsibilities each party had for things like childcare and homemaking.
  • The future needs of each party, including age, health, and financial resources.

The financial order that you receive will always depend on your unique circumstances.

Get expert family law advice

Getting advice from a divorce lawyer will ensure that all your legal bases are covered.

At Rose Lawyers, we have decades of experience helping our clients protect their interests when going through a divorce. Our family lawyers will handle your case with the care and sensitivity that it requires.

For expert advice on your divorce and inheritance, call Rose Lawyers on 03 9878 5222 .

How to determine inheritance if the intended beneficiary is deceased

Date: October 5, 2020

How to determine inheritance if the intended beneficiary is deceased

One thing that is clear with each probate case is that every family is different. Some families agree about what should happen with the estate, and others do not. But what happens when the person who passes away has heirs who cannot be located?

Whether an individual is an heir or a beneficiary of an estate depends on if the person who passed away, also called the decedent, had a Will. When there is a Will, the individuals or charities named in the Will are beneficiaries of the estate. But, if there was no Will, the family members who could inherit property are called the heirs.

When a probate estate is opened but some of the heirs cannot be located, the personal representative has the responsibility of locating the heirs, or at least making the best efforts possible to locate those heirs. There are a few ways that this can be accomplished.

1. Affidavit of Heirs

An Affidavit of Heirs is a document that is prepared for the court and lists all of the known heirs of the individual who passed away. It is important that the person filling out the document is familiar with the family of the decedent so that they can provide adequate information on the heirs. If there are questions about some of the relatives, it is important to try and communicate with other family members to get the necessary information. The Affidavit of Heirs asks about the names, addresses, ages, and dates of death of the relatives of the decedent. While the spouse and children are typically easy categories to complete, other relatives such as grandparents or aunts and uncles of the decedent are often a little more difficult to have all of the information for.

It should be noted that just because a relative is listed on the Affidavit of Heirs, this does not mean that they are necessarily entitled to inherit from the estate. That being said, by filling out the Affidavit of Heirs completely, the probate process can move more quickly because the court knows where the potential heirs are located.

If you want additional information on the process for completing an affidavit of heirs, please check out our article Affidavit of Heirs: Speed Up the Probate Process by Locating Heirs.

2. Heir Search

An heir search is exactly what it sounds like – it is a search for heirs. The search can either determine who the heirs are or the location of the heirs. A number of companies provide the service of conducting an heir search on behalf of someone for an estate. These companies will do a search to determine all of the heirs of an individual and attempt to locate them.

This can be useful for filling in gaps on the family tree and then being able to locate and contact those heirs if necessary. Some probates will be opened where the decedent’s heirs are. Heir searches help to provide a clearer picture of the heirs that need to be included in the probate process.

Another option that works for some families is hiring a private investigator to look into the heirs and the current addresses for those heirs. This is not the best option for every probate but may be helpful in certain situations. If you choose to use an heir search service, please ensure that you have read reviews or other information about the heir search before proceeding with a particular company.

3. Publication

Another option to locate heirs is to run publication in a newspaper. While this can be useful and even required by the court, publication will only help if someone sees the notice in the newspaper. The publication would include information such as the probate case number and the name of the decedent. Generally, publication will not be the only step that someone takes to locate heirs in an estate.

Conclusion

When there are heirs that need to be located, it is important to communicate with other family members and heirs to attempt to locate anyone whose name or address you do not know. This information is essential for the Affidavit of Heirs, which can help to progress the probate process. If there are still people whose names you do not know or if you do not know where they are currently living, an heir search can be useful to obtain that information. Finally, there is also the option of publishing a notice in a newspaper to try and locate heirs.

The process of locating heirs will be different for each family. We handle many cases where clients and heirs live outside of Florida, in different states, time zones, and countries. We are always willing to answer questions that you may have about opening a probate and locating heirs. If we cannot assist you with your case, we are happy to help you find another attorney who can. Contact us today.

As a reminder, the information provided on this blog article is only to be used for general informational purposes and not intended to be used as legal advice.

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How to determine inheritance if the intended beneficiary is deceased

Justin helps clients put together unique estate plans, including assistance with Trusts, Wills, Powers of Attorney, and Advance Directives. He also works with clients to set up Special Needs Trusts for their children.

Justin serves as a member of the American Academy of Estate Planning Attorneys (AAEPA), a national organization comprised of legal professionals concentrating on estate planning. As a member of the Academy, he receives ongoing, comprehensive training on modern estate planning techniques.

How to determine inheritance if the intended beneficiary is deceased

Receiving an inheritance can provide a financial windfall, but there are some scenarios where you may prefer not to receive one. In that case, you might be wondering if it’s possible to decline an inheritance and the responsibilities that go with it. This process is called “disclaiming” an inheritance, which means you’re turning down the rights to the assets you were supposed to inherit. Initiating this starts with understanding the legal process and various rules that are involved. If you’re considering disclaiming an inheritance, you may want to speak with a financial advisor about it.

What Does It Mean to Disclaim an Inheritance?

First, it’s important to understand what disclaiming an inheritance means. In a nutshell, it means you’re refusing any assets that you stand to inherit under the terms of someone’s will, a trust or, in the case of a person who dies intestate, the inheritance laws of your state. You can also disclaim an inheritance if you’re the named beneficiary of a financial account or instrument, such as an individual retirement account (IRA), 401(k) or life insurance policy.

Disclaiming means that you give up your rights to receive the inheritance. If you choose to do so, whatever assets you were meant to receive would be passed along to the next beneficiary in line.

It’s not typical for people to disclaim inheritance assets. And while it may seem strange to do so, there are some instances where it might be preferable for an heir or beneficiary to turn down an inheritance.

Reasons for Disclaiming an Inheritance

There are no specific rules for when you can or can’t disclaim an inheritance; it’s more a matter of personal choice. With that in mind, you may choose to refuse an inheritance for any of the following reasons:

  • You’d rather have someone else, such as a sibling, child or charity, inherit the assets that were intended to go to you instead and you want a workaround for paying gift tax.
  • Inheriting assets would increase the size of your estate and potentially create tax planning complications for your own heirs once it’s time to pass your assets on.
  • Accepting certain assets, such as money held in an IRA, would push you into a higher tax bracket and you’d rather avoid getting stuck with a large tax bill.
  • Allowing the inheritance to pass to someone else would allow for the wishes of the deceased person to be more accurately fulfilled.
  • Receiving an inheritance would affect your ability to qualify for certain types of federal benefits, such as student loans or Medicaid.
  • You just don’t need the inheritance because you’re financially stable and would rather someone else benefit from it.

Those are all valid reasons to disclaim inheritance, but in some instances it may come down to simply not wanting whatever it is you’re supposed to inherit.

Say, for example, a relative leaves you their home, which is in need of extensive repairs or has expensive property taxes. If their will stipulates that you can’t sell the property and renting it out isn’t an option, then disclaiming it may be the best choice for shifting the financial burden of owning it to someone else.

How to Disclaim Inheritance Rights

How to determine inheritance if the intended beneficiary is deceased

If you feel that refusing an inheritance is the right thing to do, for whatever reason, you need to know what’s required to do so. First, there are certain guidelines you need to follow to satisfy the IRS and ensure that you’ve properly disclaimed an inheritance. Specifically, the IRS requires that:

  • You make your disclaimer in writing.
  • Your inheritance disclaimer specifically says that you refuse to accept the assets in question and that this refusal is irrevocable, meaning it can’t be changed.
  • You disclaim the assets within nine months of the death of the person you inherited them from. (There’s an exception for minor beneficiaries; they have until nine months after they reach the age of majority to disclaim.)
  • You receive no benefits from the proceeds of the assets you’re disclaiming.
  • The assets you disclaim don’t pass to you in any way, either directly or indirectly.

Aside from that, you also have to follow any guidelines set by your state to disclaim an inheritance. For example, your state might require that a disclaimer be notarized or witnessed, filed with the probate court or shared with the executor of the deceased person’s estate or the trustee in charge of distributing assets from a trust.

What Happens to a Disclaimed Inheritance?

It’s very important to note one thing about disclaiming an inheritance: you don’t get to decide what happens to it.

Once you sign off on a refusal to inherit, the assets you would have received are passed on to the next person in line. That’s important to remember if you plan to disclaim an inheritance so that your child or another family member can receive it instead. Unless they’re the next beneficiary or heir on the list, there’s no guarantee that the assets will go to them.

And if you’re considering disclaiming assets you should consider how that may impact the person who will receive them. Say, for example, that the next beneficiary after you is a family member with special needs. If you’re passing on a large inheritance to them because you’ve refused it, that could affect their ability to continue receiving Medicaid, disability or other government benefits.

It’s also important to keep in mind that disclaiming an inheritance is permanent. If you change your mind down the line and decide you do want the assets you would have inherited, you can’t reverse your original disclaimer.

But you could avoid disclaimer’s remorse by only refusing part of an inheritance. There’s no rule that says you have to disclaim all of the assets you’re entitled to receive as an inheritor. So if a family member names you the beneficiary of their IRA, for example, and also wills their home to you, you could choose to keep the money from the IRA and let someone else have the house.

Bottom Line

How to determine inheritance if the intended beneficiary is deceased

Disclaiming an inheritance isn’t something you might automatically choose to do, but it’s good to know the option exists if receiving an inheritance isn’t right for you. The most important thing is to understand what you’re giving up and how to disclaim assets properly so there are no questions or conflicts later. Talking to an estate planning attorney can help you decide whether it makes sense to disclaim and understand how to do it properly based on the laws in your state.

How to determine inheritance if the intended beneficiary is deceased

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How to determine inheritance if the intended beneficiary is deceased

After a person passes away, it is often a challenge for loved ones to figure out what happens next. In addition to the emotional and mental distress of losing someone, there are added challenges when it comes to handling everything the deceased person left behind. Whether you are an executor or a relative, you may find yourself in need of assistance when it comes to things like last wills and testaments, medical records, or titles.

In this guide, we will discuss one of those topics – how to transfer a car title. Transferring ownership of a car after death is one of the many cumbersome tasks that are left in the hands of loved ones and beneficiaries. While it is likely one of the last things a grieving person wants to deal with, it is a part of the process of handling the deceased person’s belongings. To help you with the process, we’ve outlined the few steps you will need to take to transfer the title.

How to Transfer a Car Title When The Owner Is Deceased

So, why do you need to transfer a car title when the owner is deceased? This process is necessary for beneficiaries if you want to keep the vehicle, gift it to a family member, or sell the vehicle to someone else. However, it is not as simple as handing over the keys to the new owner. Below, we will discuss who is in charge of the title transfer, as well as the steps to take if the vehicle is a part of a probated estate, what to do if there is no probate, and how to sell the vehicle.

How to determine inheritance if the intended beneficiary is deceased

Who Is Responsible For Transferring A Car Title Of A Deceased Person?

We’ve been asked a form of this question many times: “My husband died and my name is not on the car title. What do I do?” Whether you are a surviving spouse, a joint-owner, or a beneficiary, you have the legal authority and obligation to transfer the title of the vehicle to someone else after the owner has passed away (if the vehicle is going to be used, that is). The way to do so simply depends on whether or not the vehicle is part of a probated estate.

Is The Vehicle Part of a Probated Estate?

Once a vehicle owner has passed away, the process for transferring the car title of the deceased person varies depending on whether the vehicle title was in the individual’s name as a decedent or whether it was in a joint ownership. If the title was only in the decedent’s name, you’ll need to determine if the estate is being probated.

What’s a probated estate? Probate is a legal process that involves administering the estate of the individual who has passed away. It typically happens when there is no living spouse or beneficiary listed on the will. A probate proves that the last will and testament is legitimate, checking out the deceased person’s assets and property. Then, the Probate Court determines how to proceed with the person’s belongings. During this process, the deceased individual’s property will be distributed based on their will.

If the vehicle is part of a probated estate, follow these steps to transfer the car title of a deceased person:

1. Contact Probate Court and attorney.

A car title cannot be transferred until the probate is completed, so the executor or administrator of the deceased should contact Probate Court or an attorney as soon as possible to receive further instruction. Depending on the situation and the circumstances, getting the title transferred can be a complicated process. Because every situation is different, it helps to have someone who understands the legal process working in your favor. Once the probate is completed, the heir will receive the vehicle, or the executor can opt to sell it if he or she was the one given the vehicle.

2. Gather the required documents to transfer the car title of a deceased person.

While the documents needed does vary slightly from one state to the next, you need to have all of the following in order to transfer the title in most states:

  • Order from Probate Court to transfer the vehicle
  • Certificate of the title
  • Odometer disclosure statement
  • Death certificate
  • Transfer fee
3: Visit the Title Office.

If you are the beneficiary of the vehicle or the administrator of the deceased person’s estate, you can visit the Title Office with the above documents to initiate the title transfer.

How to determine inheritance if the intended beneficiary is deceased

How to Transfer a Car Title Without Probate

The process of transferring the title of a vehicle without probate varies depending on what state you live in. Most states require the deceased individual’s property not to exceed a certain amount and it to be a certain amount of time since the person has passed away before the transfer of the title can be initiated.

In many states, the Department of Motor Vehicles makes it fairly easy to transfer the car title of a deceased person when there is no probate involved. If you are the administrator, joint-owner, spouse, or beneficiary, you may only need to take the death certificate and the title of the car to your Title Office and they will retitle it – no court order or attorneys required.

Affidavit To Transfer Without Probate

In some cases, the vehicle of the deceased person will be in the possession of someone other than the beneficiary or administrator or the will. This does not mean that the vehicle is gifted to that person, however. If there is no probate on the deceased person’s belongings, the beneficiary can use an affidavit in order to obtain possession of the vehicle. In most states, you can find the Affidavit for Transfer of Personal Property form online.

Keep in mind, using an Affidavit for Transfer of Personal Property is not the same thing as transferring the title of the vehicle. You will still need to follow the steps mentioned above after gaining possession of the vehicle.

How To Sell The Car of a Deceased Person

If you have already transferred the title, you can sell the vehicle of the deceased person much like you would sell any used car. However, if the beneficiary or executor is certain they want to sell the car after the person has passed, they do not necessarily need to get the title transferred prior to putting the vehicle on the market. Instead, they can put the car up for sale; once they find a buyer, the beneficiary or executor will sign the title with their name and role (executor for [deceased person’s name]). Then, the buyer will be in charge of getting the title transferred themselves.

There may additional registration fees depending on what the status of the vehicle is. All of these fees will be determined and relayed to you after you submit your application to your local DMV. Furthermore, in the event that the vehicle was not registered by the deceased, the new owner will be held responsible for paying any registration fees or penalties.

To learn more about handling the legalities of a deceased family member, here’s a look at how to obtain medical records of someone who has passed away.

When the one insured in a life insurance policy dies the proceeds go to the named beneficiary. If the beneficiary dies ahead of the insured, the proceeds will still be paid out.

Who becomes the beneficiary of a life insurance policy if the beneficiary is dead?

The insurance company will determine if there are primary co-beneficiaries named in the policy. If there are, the proceeds will be divided among these co-beneficiaries. When one of the co-beneficiaries dies, the remainder of the proceeds will be paid out to the surviving beneficiaries.

But what happens if all primary co-beneficiaries die ahead of the one insured?

The insurance company will check if there are secondary beneficiaries. These are individuals who will get to receive the proceeds when all primary beneficiaries are deceased.

For example, under a policy the wife is named the primary beneficiary and a son is named as secondary beneficiary. The husband may have wanted that the son receives the proceeds only in the event the wife dies ahead of him. Contrast this to having the son named as co-beneficiary wherein he and the wife would both be awarded with the death benefit.

What happens when both primary and contingent beneficiaries die?

In case all beneficiaries have died, the proceeds will be paid to the insured individual’s estate. It will pass through probate and will be subject to procedures and charges determined by court.

Usually, distribution of the money will be in accordance to the insured individual’s will. If the will does not contain specific instructions as to how the proceeds will be distributed, it will follow the laws of the state or the court will make that decision.

Do life insurance proceeds go to the estate or to the next of kin?

The beneficiary named in the policy will receive the proceeds regardless whether he or she is next of kin or not. In case the beneficiary is deceased, the insurance company will look for primary co-beneficiaries whether they are next of kin or not. In the absence of primary co-beneficiaries, secondary beneficiaries will receive the proceeds. If there are no living beneficiaries the proceeds will go to the estate of the insured.

Can the next related person be a contingent beneficiary if not named?

No. Contingent beneficiaries have to be named in the policy. It is therefore important to name indicate who are the primary and secondary or contingent beneficiaries. Not naming them will cause the proceeds to be passed on to the insured individual’s estate which will be subject to probate and therefore incur charges and delays related to estate settlement.

By naming beneficiaries, the probate process is bypassed. Furthermore, creditors can make claims on estate proceeds. In majority of the states, proceeds from life insurance policies are exempted from creditors claims when beneficiaries are named in the policy.

Basis In Inherited Property

May 15, 2017
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A beneficiary of an estate will often receive property other than cash as a part of an inheritance. It is common for the beneficiary to be unfamiliar with the circumstances under which the decedent obtained the property or the price paid by the decedent for the property. When a beneficiary decides to sell inherited property, either immediately upon receipt or at some later time, it is important for the beneficiary to know his or her cost basis in the property for purposes of determining gain or loss.

In general, basis in property inherited from a decedent who died before or after 2010 is either: (i) the fair market value of the property on the date of the decedent’s death, or (ii) the fair market value of the property on the alternate valuation date (if the executor of the decedent’s estate chooses to use an alternate valuation).

Despite these general rules, there are some notable exceptions. For example, under a special-use valuation rule, the executor of an estate can, for federal estate tax purposes, elect to value qualified real property on the basis of its actual use for farming or closely held business purposes rather than on the property’s fair market value. In these situations, the basis of such property in the hands of the beneficiary is the value used under the special use-valuation method and not the property’s fair market value. Additionally, if a beneficiary inherits property subject to a qualified conservation easement, the beneficiary’s basis in that property will generally be equal to the decedent’s adjusted basis in the property to the extent of the value excluded from the decedent’s taxable estate as a qualified conservation easement. Moreover, if a federal estate tax return does not have to be filed (for example, if the decedent’s gross estate is less than $5,490,000 in 2017), then the beneficiary’s basis in inherited property will generally be equal to the property’s appraised value as of the date of death for Pennsylvania inheritance tax purposes.

Special rules apply for determining basis in jointly owned property. If spouses held property as either tenants by the entirety or as joint tenants with right of survivorship, then the surviving spouse’s basis in the property is the cost of the survivor’s half of the property with certain adjustments. The cost must be reduced by any deductions allowed to the surviving spouse for depreciation and depletion, and the reduced cost must be increased by the survivor’s basis in the half inherited.

If a non-spouse beneficiary and a decedent owned property as joint tenants with right of survivorship, the beneficiary’s basis in the property is determined based on a contribution rule. The contribution rule provides that the beneficiary’s basis in jointly owned property will be determined based on the proportionate amount the beneficiary contributed to the original purchase price and, with respect to depreciable property, the way the beneficiary had been allocated income from the property.

If a beneficiary receives appreciated property from a decedent and that beneficiary (or the beneficiary’s spouse) gave the property to that decedent within one year before the decedent’s death, the beneficiary’s basis in the property is the same as the decedent’s adjusted basis in the property immediately before death. Thus, a basis step-up cannot be obtained by transferring property to a decedent immediately before death with the intent that the property be returned to the donor.

If a beneficiary inherited property from an individual who died in 2010, the beneficiary’s basis in the property depends on whether the executor of the decedent’s estate made a “Section 1022 election.” If the executor did not make a Section 1022 election, the beneficiary’s basis in the inherited property is determined under the general rules previously described. If the executor did make a Section 1022 election, the basis of property acquired from the deceased individual generally is determined under the modified carryover basis rules of Section 1022, which provide that the beneficiary’s basis is the lesser of the decedent’s adjusted basis or the fair market value at the date of the decedent’s death, increased by any allocation of “Basis Increase” (with certain other adjustments).

Lastly, the basis of certain property acquired from a decedent cannot exceed the value of that property as finally determined for federal estate tax purposes. If the value is not finally determined for federal estate tax purposes, the beneficiary’s basis cannot exceed the value of that property as reported on Form 8971.

There are many rules that apply to determining a beneficiary’s basis in inherited property, and those rules can be complex. It is advisable for a beneficiary to have a clear understanding of his or her basis in inherited property at the time the property is received, as it can be difficult to determine basis in inherited property many years after the estate has closed. If you have questions concerning basis in property you inherited, please contact a member of the McNees’ Estate Planning Group or Andrew Rusniak at [email protected] to assist you.

© 2017 McNees Wallace & Nurick LLC
McNees Insights is presented with the understanding that the publisher does not render specific legal, accounting or other professional service to the reader. Due to the rapidly changing nature of the law, information contained in this publication may become outdated. Anyone using this material must always research original sources of authority and update this information to ensure accuracy and applicability to specific legal matters. In no event will the authors, the reviewers or the publisher be liable for any damage, whether direct, indirect or consequential, claimed to result from the use of this material.

How to determine inheritance if the intended beneficiary is deceased

How to determine inheritance if the intended beneficiary is deceased

How to determine inheritance if the intended beneficiary is deceased

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Do Grandchildren Have Inheritance Rights?

How to determine inheritance if the intended beneficiary is deceased

Grandchildren do not have automatic inheritance rights except under certain circumstances. In New York, the most common scenario where a grandchild may inherit is when a grandparent passes away without a Will and the grandchild’s parent is no longer living. This intestate succession is controlled by statute and passes down the bloodline. Pursuant to the intestacy statute, if a married person passes away, then their first $50,0000 and half their assets pass to their spouse with the other half split between any children. But if a child had previously died, then that deceased child’s share passes to the deceased child’s children. If unmarried, all assets pass to their children, again with a grandchild standing in the shoes of the deceased parent.

A grandchild could also inherit assets intended for a parent under a last will and testament. An estate planning attorney drafting a Will for a client always considers who would inherit if a beneficiary dies before the person making the will, called the Testator. In many cases a parent wants their child to inherit and if any child passes away, the assets to pass to grandchildren. This can be written into a Will in several ways. The assets could be left per stirpes, with the share that would have been given to the heir being distributed among the heir’s issue in equal shares. The assets could be left per capita, literally meaning “by heads”, which do not pass on to the next generation if a beneficiary is predeceased, but are instead distributed equally among the living beneficiaries. The Will could also specifically spell out who inherits if a beneficiary predeceases the Testator. Finally, if the Will is silent as to who inherits if a particular beneficiary is no longer living, the asset would pass to the “remote contingent.” A remote contingent is a catchall clause that specifies who inherits if any bequest fails due to the beneficiary predeceasing the Testator. The remote contingent can be multiple individuals and charities. The default remote contingent clause cites to the intestate statue, leaving it to the statute to determine shares. As discussed above, the intestate statute uses per stirpes distribution.

Including a Grandchild in a Will or Living Trust

If a grandparent wishes to provide for a grandchild, they should do so explicitly in a Will or living trust. If grandchildren are under the age of 18, assets must be left in a testamentary trust because minors are not permitted to own assets directly. By directing a grandchild’s share to a trust, the testator can name the Trustee of the trust and determine at what age the beneficiary is to receive the assets. A grandchild can receive income under the trust and the Trustee can distribute principal for their health, education, maintenance or support. The trust can also continue for a grandchild’s lifetime instead of terminating the trust at a certain age. By keeping the assets in trust, the assets remain creditor protected.

Supplemental Needs Trusts for Disabled Grandchildren

If gifting to a disabled grandchild who is the recipient of any means-based government benefits, their share should be directed to a Supplemental Needs Trust rather than outright to the grandchild. This will ensure that they maintain eligibility for their government benefits, while still enjoying the inheritance in a way that can enhance their quality of life. The Supplemental Needs Trust can be drafted within a Will estate at the testator’s death or as a free-standing supplemental needs trust during a grantor’s life.

It is important to note the passing of the Secure Act in 2019 did away with the availability of the lifetime stretch and the incentive to leave retirement accounts to grandchildren. Under the new law, unless a grandchild is deemed disabled, paying out a large retirement account to them comes with negative tax consequences because all the assets must be distributed within ten years and are taxed as ordinary income tax to the beneficiary. It is therefore important to speak with a professional prior to naming anyone other than a spouse a beneficiary under an IRA or 401K.

In assessing who inherits what, it is crucial to consider which assets actually pass through a Will or via the intestacy statute. Certain types of assets, such as retirement accounts and life insurance policies, usually have named beneficiaries, so these assets go directly to whomever was named and never pass through the courts. Beneficiary designations supersede wills and trusts and will pay out to the beneficiary immediately at death. Likewise, any joint account passes to the surviving account holder. Real estate held by spouses or with rights of survivorship also pass to the survivor. Married couples often avoid probate on the first spouse’s death this way, with nothing passing to children. Therefore, estate planning involves knowing which assets pass through a will and which directly to a named beneficiary, to avoid any surprises.

Experienced Help in Estate Planning for Grandparents

Lack of planning can result in undesired and unintended consequences. Whether or not to provide for your grandchildren is not a simple yes or no question. Anyone contemplating how to leave assets to grandchildren should meet with an estate planning attorney to discuss review all options and design a plan that works best for the family.

How to determine inheritance if the intended beneficiary is deceasedInheriting an IRA without messing up your required minimum distributions (RMDs) is surprisingly difficult. There are thousands of articles telling you things not to do. Even estate attorneys make mistakes. The worst part is many of these articles have seeming disagreements. One says that you should never leave your IRA to a trust. Another touts the benefits of establishing an IRA Beneficiary Trust. All this advice is very confusing to sift through.

Oddly enough, how a trust inherits an IRA is as important as what it does with the IRA after receiving it.

If the IRA is passed to probate and, via the Will, given to the Trust, then it doesn’t matter what the trust does with the IRA, the balance of the IRA must be distributed within 5 years of the decedent’s death or according to the original IRA owner’s divisor if the decedent died after his or her required beginning date.

This is because only spouses or designated beneficiaries are given an exception to this 5-Year rule.

If however the trust can trace its inheritance back to a beneficiary designation, then it is on its way to qualify for the exception.

The trust has two things it can do with an inherited IRA:

  1. It could hold it in trust, meaning in an account under its own ownership.
  2. It could distribute the account in-kind to the trust’s beneficiaries to own outright or free of trust.

Which method of inheritance depends on what the trust instrument requires.

The average trust is really just a will substitute, designating beneficiaries and allowing the assets to pass out of trust on to new owners almost immediately. After opening an inherited IRA owned by the trust and transferring the decedent’s assets in, then you can open one inherited IRA for each beneficiary and transfer just their share into the account. In this way, you provide the heirs with an in-kind inheritance free of trust.

If you must host the heir’s assets in trust but are allowed to create separate trusts, then you can open separate accounts titled after the various beneficiary trusts and transfer just their share into each of those accounts.

You have until Dec. 31 of the year following the year of the original IRA owner’s death to split the IRA into separate Inherited IRAs, one for each beneficiary. If you don’t split the accounts by that date, then you have to use the Inherited Divisor of the oldest beneficiary to calculate all RMDs for those funds. This hurts all the younger beneficiaries by a factor of the difference in their ages.

Some trusts have provisions which require keeping the assets of different beneficiaries combined. A “common pot” trust, where beneficiaries are all equally entitled to the funds according to their needs not shares, is an example of an estate plan that would not be able to split among the heirs.

If the assets must be held in one trust, then there needs to be at least one clear beneficiary who receives distributions from the trust to qualify as a “Look-Through Trust” and allow heirs to use the oldest beneficiary’s divisor from the Single Life Table to calculate their Inherited RMD.

If the trust does not allow distributions to the beneficiary or beneficiaries, then it is not a “qualified trust” according to the 401 rules and any IRA assets must be distributed according to the 5-Year Rule.

Trusts which require net income distributions should qualify as look-through trusts as the value of the RMD will be included in the net income distribution calculation.

For these types of trusts, the inherited IRA will be owned in the name of the trust. You can then take the trust RMD from the trust’s inherited IRA to the trust’s taxable account. Then, later, when you are calculating net income distributions, you can distribute the full net income (already taken RMD included) from the taxable account to the respective beneficiaries and their individually-owned taxable accounts.

For more on how IRAs interact with trusts, you may enjoy reading “6 Ways To Prevent Your Estate Plan From Ruining Your Roth IRA.”

New York’s Children Inheritance Laws

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  • New York’s Children Inheritance Laws
  • How to Determine Who Is an Heir
  • Intestacy Rules in Colorado
  • The Property Rights of a Wife After a Husband’s Death

If the decedent owns stock when he dies, the stock is included in his estate. A beneficiary is someone who receives property from the estate through a will. The entire process of distributing property is defined by the probate code of the state where the decedent lived. While state laws vary, the Uniform Probate Code has influenced almost all states’ probate laws. As a result, when speaking of probate matters generally, the UPC offers a good framework for general discussion.

Valid Will

If there is a valid will but it does not specifically identify a beneficiary who will receive the stock, that asset will probably be distributed through the residuary clause. A residuary clause is normally the last part of the will that distributes to a beneficiary whatever remains of the estate after all the other dispositions expressly authorized by other provisions of the will have been made.

Intestate

If there is no will, there are no beneficiaries and the estate is considered “intestate.” The intestate process is a state-approved distribution plan for estate property. The property is generally distributed among the surviving relatives of the decedent. Most times the surviving spouse, parents, and children of the decedent get the property. If the decedent is not survived by any close relatives, his property may go to any surviving aunts, uncles, nephews, nieces or grandparents. If he is not survived by any living relatives, his property generally goes to the state where he lived.

Spousal Share

Another reason a beneficiary may not be named for stock is because the decedent assumed it would automatically go to his spouse. In the 13 states that follow the “community property rule,” all assets acquired during the marriage by either spouse is co-owned by both of them. When one spouse dies, the community property generally goes to the surviving spouse.

Close Corporation Shares

If the stock is not listed in a will, it may be because the stock is in a close corporation and is subject to a shareholders’ agreement. A close corporation is a non-publicly traded corporation. Often the few shareholders hold significant positions in the business. Given the nature of the business, the shareholders may not want to permit a new person gaining an ownership share merely because one of the original shareholders died. As a result, the shareholders may draft a shareholders’ agreement where the shareholders agree that when one of them dies, the business will buy out the shares from the estate. As a result the shares are not transferred to a specific beneficiary, but are repurchased by the business with the proceeds from the acquisition being put in the estate.

How to determine inheritance if the intended beneficiary is deceased

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How to determine inheritance if the intended beneficiary is deceased

How to determine inheritance if the intended beneficiary is deceased

It can create a significant problem if a last will and testament isn’t regularly updated and a beneficiary dies. The question becomes what happens to that person’s share of the estate if they’re no longer alive to receive it when a beneficiary dies before the “testator,” the person who left the will. That depends on the language stated in the will.

When a Bequest “Lapses”

Your will might say, “I give 20% of my estate to Bob if he survives me.” Bob’s share of the estate will “lapse” if Bob doesn’t survive or live longer than the testator so he isn’t alive to receive it. Bob’s 20% share would legally cease to exist because he’s no longer living to accept it.

A lapsed bequest can cause a complicated ripple effect.

All states have some form of “anti-lapse” statutes on their books that would allow the deceased beneficiary’s share to go to their family, provided that they were a close relative of the deceased. But these laws can vary widely from state to state, so don’t depend on this provision when you’re planning your estate.

The Residuary Estate

A lapsed share remains in the estate to be divided among other beneficiaries. Bob’s lapsed 20% would become part of the estate’s “residuary,” what remains and is effectively left over after all other specific bequests have been made. The residuary estate will typically move to other surviving beneficiaries.

Residuary estates often include assets that a decedent forgot to include in their will. They can also occur because the decedent acquired additional assets, then failed to update the will to pass them on, or because a beneficiary has died.  

For example, Bob might have been given 20%, while Sally received 40% and Joe received 40%. Sally’s and Joe’s shares will grow, because Bob’s 20% will be absorbed back into the estate, effectively making it larger than it would have been if he had been alive to accept his share. Sally and Joe would receive 50% each, each of them gaining half of Bob’s unclaimed bequest.

“Per Stirpes” Provisions

Another possible scenario is that your last will and testament provided for the eventuality that all your beneficiaries might not outlive you. Your will might instead have said, “I give 20% of my estate to Bob if he survives me. I give 20% of my estate to Bob’s then living descendants, per stirpes, if Bob doesn’t survive me.”

“Per stirpes” is a Latin phrase that translates to “by roots.” The roots, in this case, are Bob’s children—Susie and Walter. Each would inherit 10% of the estate in a per stirpes distribution, or half of Bob’s share if Bob isn’t living but if they survive him.

Per stirpes provisions can extend for a generation. Maybe Susie is also deceased, but she’s survived by her two children, Alex and Zane. Alex would receive 5% of Bob’s share, and Zane would receive 5%—half each of Susie’s inherited 10%. Walter would still receive his original 10%.

Each deceased parent’s share passes to his or her children in equal measure in a per stirpes distribution.

State Intestacy Laws

Your state’s intestacy laws would become involved if your will states, “I give 100% of my estate to Bob” . . . and nothing else. There are no other beneficiaries, and Bob is deceased. That makes your will null and void.

Each state has a prescribed list in its statutes as to who inherits when this happens. The process is called “intestate succession.” The estate will most likely pass to the deceased’s closest kin based on his state’s intestacy laws—not Bob’s kin as a deceased beneficiary because Bob’s own death has made the will null and void.

Intestacy laws come into play when a decedent dies without any sort of an estate plan.

The lion’s share of an intestate estate typically goes to the surviving spouse, with the decedent’s children also getting a share. It’s possible that no one else—not Bob’s siblings, not his parents, and not even his grandchildren—would receive anything if the deceased left both a surviving spouse and children.

The deceased’s most immediate family would most likely inherit everything if they haven’t also predeceased the testator. They’ll get Bob’s 100%, even if that’s not what Bob would have wanted or intended.

The worst case scenario would be that both the decedent and Bob leave no living kin, or that they can’t be identified or located. The estate would “escheat” to the state in this case—the state would “inherit” and receive all his property.

The Bottom Line

Estate planning attorneys usually recommend that you update your will or living trust after life-changing events, such as the death of a named beneficiary. It will save your estate time and money in the long run, and your true wishes will be clear and unambiguous.

Frequently Asked Questions (FAQs)

What happens if the executor named in the will predeceases the person who left the will?

The probate court will appoint someone to take on the role and responsibilities of executor if the individual named in the will has predeceased the decedent, and if the decedent didn’t name an alternate executor in their last will and testament.

What happens to life insurance benefits if the beneficiary predeceases the insured?

Life insurance policies will often name both “primary” and “contingent” beneficiaries. The contingent beneficiary would inherit if the primary beneficiary were deceased at the time of the insured’s death. The benefits would go to the estate if neither a primary or contingent beneficiary were living or named.

How to determine inheritance if the intended beneficiary is deceased

By Deborah Shipman, CIP, CISP, CHSP

How are beneficiary payouts affected when a primary beneficiary dies after the IRA owner?

When a primary beneficiary dies after the IRA owner, he is still considered a beneficiary. If that deceased beneficiary did not name secondary beneficiaries to continue receiving his portion of the IRA, it will be subject to the probate laws that would apply to his estate. If the deceased beneficiary did name beneficiaries to receive his portion of the IRA upon his death, they will receive his portion of the IRA assets. Keep in mind, however, that such secondary beneficiaries would not be able to use their own life expectancies to determine the required payments.

Example 1

Thomas was the original IRA owner and William, Joseph, Lynne, and Louise are each 25% primary beneficiaries. Thomas died in January of this year. Louise died in March of this year and did not name beneficiaries to her inherited IRA assets. According to the default in the IRA Agreement, Louise’s estate becomes her beneficiary. Therefore, the financial organization will pay out as follows; 25% each to William, Joseph, Lynne, and Louise’s estate.

Example 2

Joanne was the original IRA owner and Jackson, Jacob, Vanessa, and Sue are each 25% primary beneficiaries. Joanne died in January of this year. Sue died in March of this year and named Benjamin and Evelyn as each 50% beneficiaries of her inherited IRA assets. Therefore, the financial organization will pay out as follows: 25% each to Jackson, Jacob, and Vanessa, and 12.5% each to Benjamin and Evelyn.

How are beneficiary payouts affected when a primary beneficiary dies before the IRA owner? Do we just divide his or her percentage equally among the remaining beneficiaries?

Not necessarily. If a primary beneficiary dies before the IRA owner, she generally ceases to be a beneficiary and the assets would be divided among the remaining surviving beneficiaries. (Less common than this “per capita” beneficiary succession is what is known as “per stirpes” succession, in which the heir(s) of a primary beneficiary who died before the IRA owner would inherit after that primary beneficiary’s death.) If the original beneficiaries are entitled to equal percentages, then they are entitled to an equal share of the predeceased beneficiary’s portion. But if the original beneficiaries are not entitled to equal percentages, then they are not entitled to an equal share of the predeceased beneficiary’s portion.

Example 1

Mark was the original IRA owner and Logan, Kathryn, Elizabeth, Andrew, and Erika are each 20% primary beneficiaries. This year, Erika died in April and Mark died in May. Because Erika predeceased Mark, the original IRA owner, she is no longer considered a beneficiary. Additionally, because Logan, Kathryn, Elizabeth, Andrew, and Erika were named as equal beneficiaries at 20% each, the surviving beneficiaries will split the IRA assets equally, with the financial organization paying out as follows: 25% each to Logan, Kathryn, Elizabeth, and Andrew.

Example 2

Sarah was the original IRA owner and Amy, Melissa, Peter, Michelle, and Luke are primary beneficiaries—each designated a different percentage: Amy 15%, Melissa 5%, Peter 5%, Michelle 40%, and Luke 35%. This year, Luke died in April and Sarah died in May. Because Luke predeceased Sarah, the original IRA owner, he is no longer considered a beneficiary. Additionally, because Amy, Melissa, Peter, Michelle, and Luke were named as beneficiaries with different percentages, the surviving beneficiaries will each receive a portion of Luke’s 35 percent based on their initial percentage.

To determine the surviving beneficiary’s new percentages, the financial organization will

1) add together the surviving beneficiaries’ original percentages (15 + 5 + 5 + 40 = 65), and

2) divide each of the surviving beneficiaries’ original percentages by the total percentage to be received by the surviving beneficiaries (15/65 = 23.08%; 5/65 = 7.69%; 5/65 = 7.69%; 40/65 = 61.54%).

The financial organization will pay out deceased beneficiary Luke’s share as follows: 23.08% to Amy, 7.69% each to Melissa and Peter, and 61.54% to Michelle, all of which total 100% (23.08 + 7.69 + 7.69 + 61.54).

If a loved one passes away and you are the beneficiary of their IRA, you might not know what you need to do next. The IRS has a lot of complicated rules about inherited IRAs, and you can be subject to large penalties if you don’t follow them.

While it’s always a good idea to get tax advice from an attorney or accountant, we’ve put together a handy guide to help you figure out what you need to do to stay on the IRS’s good side when calculating RMD an inherited IRA. That’s the “required minimum distribution,” and it can get confusing!

Note: The information here pertains to Charles Schwab, eTrade and Ameritrade IRAs . or even an inherited self-directed IRA (SDIRA) . But, as always, you should check with someone on our team for the solution that will apply to you and your situation.

What Is An IRA?

Let’s start from the beginning. An IRA, which is short for Individual Retirement Account, is a retirement savings account that is not provided by your employer. You open the account yourself and can contribute up to $6,000 a year of pre-tax income, or $7,000 a year if you’re 50 or older. Yes, that means you don’t get taxed on the money you invest in your IRA.

But since Uncle Sam is involved, of course you know there must be a catch. A traditional IRA allows you to make pre-tax contributions, but you will be subject to required minimum distributions after you turn 72, and any withdrawals you take will be taxed as ordinary income after age 59½. Since you’re skipping taxes now and paying them later, traditional IRAs are called “tax-deferred retirement accounts”.

Another type of popular retirement account, the Roth IRA, is NOT a tax-deferred account. With Roth IRAs, you pay your taxes up-front by investing post-tax dollars, so you aren’t subject to required minimum distributions later in life.

How Do Required Minimum Distributions Work?

While you can invest pre-tax funds in an IRA, you’ll eventually have to pay taxes on that income. For this reason, the IRS is going to start making you take money out of your account once you turn 72, so that they can tax you on your distributions. However, if you’re still working, you can get out of taking distributions until you retire.

These mandatory annual withdrawals are fittingly called required minimum distributions, or RMDs for short. Your RMD requirement is calculated based on your age and the amount of money in your account.

Before 2020, the RMD age for IRAs was 70½, but when the SECURE Act passed in 2019, they raised the age to 72. If you turned 70½ before January 1, 2020, you may be subject to RMDs. A tax advisor can tell you if you are required to take RMDs now or when you turn 72.

If you try to skip an RMD, you can receive a whopping 50% tax penalty from the IRS. However, you may be able to receive an RMD Penalty Waive r to avoid IRS penalties under certain circumstances.

Inheriting IRAs

Upon an IRA owner’s death, the remaining balance of the account will be inherited by their designated account beneficiary. The rules are different for spouse beneficiaries and non-spouse beneficiaries, so we’ll talk about them separately.

A quick note before we get into the nitty-gritty of calculating these things. These rules apply to BOTH traditional IRAs and Roth IRAs. While the original account owner was not required to take RMDs from their Roth IRAs, if you inherit a Roth IRA and transfer the assets into an Inherited Roth IRA, you will be required to take RMDs. However, as long as the funds have been invested in the Roth IRA for at least five years, your RMDs will not be taxed.

Spouse Beneficiaries

If you inherit an IRA from your spouse, you have three options:

Treat the IRA as your own by becoming the account owner.

Roll the inherited IRA balance into your own IRA.

Transfer the balance to an Inherited IRA .

If you decide to treat the IRA as your own or roll over the balance into your own IRA, you would simply follow the regular RMD rules for your IRA. If you choose to transfer the balance into an inherited IRA, your RMD amount will be based on your age and be recalculated each year.

Non-Spouse Beneficiaries

If you inherit an IRA from someone who is not a spouse, you cannot roll the inherited balance into your own IRA and must transfer the balance to an Inherited IRA.

If The Original Account Owner Died Before January 1, 2020

If the original account owner died before January 1, 2020 and was younger than 70½, you have two options:

Deplete the account within five years.

Take RMDs over your lifetime.

However, if the original account owner was 70½ or older at the time of death, then you must receive RMDs over your lifetime.

If The Original Account Owner Died On January 1, 2020 Or Later

If the original account owner died on January 1, 2020, or later and you are not an eligible designated beneficiary, under the 10-year rule instituted by the SECURE Act, you must deplete the account within 10 years.

Eligible designated beneficiaries include:

The original account owner’s spouse.

The original account owner’s minor child.

A disabled or chronically ill person.

Any other person who is not more than 10 years younger than the original account owner.

Under the SECURE Act, eligible designated beneficiaries still have the option to take RMDs based on their life expectancy.

How To Calculate RMD For Inherited IRAs

RMDs for Inherited IRAs are calculated based on two factors:

The account balance as of December 31 of the previous year.

The life expectancy factor for your current age.

Your life expectancy factor will be recalculated each year based on the IRS Single Life Expectancy Table . This table provides a life expectancy factor based on your current age. The older you are, the lower your life expectancy factor will be.

Once you determine the life expectancy factor for your age, you can do the following calculation:

Account Balance ÷ Life Expectancy Factor = RMD

You can also use an online RMD calculator to determine annual RMDs for you. We’ve linked a few good ones below:

Of the three systems, “common law” is unsurprisingly the most common

How to determine inheritance if the intended beneficiary is deceased

How to determine inheritance if the intended beneficiary is deceased

It’s easy to assume that writing up a last will and testament is all it takes to guarantee that your assets will be distributed according to your wishes. And in most parts of the United States, that’s basically correct. However, there are a handful of states with a caveat in place that can intervene to ensure you and your partner will receive your fair share of property whenever either of you expires.

There is no one perfect system when it comes to inheritance; some may reflect a person’s actual wishes in the event of an untimely death, while others may end up superseding what they had envisioned for their assets. There are three systems of inheritance laws in the U.S. It’s important to know which ones affect your state and, thus, your will.

Understanding Inheritance Laws

Inheritance laws are statutes and regulations that determine how individuals receive assets from the estate of a deceased family member. These laws ensure that beneficiaries can acquire some form of inheritance in the event that a will was never written or doesn’t cover all of the deceased person’s assets. In some cases, these laws also provide certain relatives with the right to claim an inheritance, which they can exercise regardless of the actual terms of the deceased’s will.

In the context discussed here, inheritance laws typically pertain to the spouse/partner of the deceased individual. While there are fewer rules regarding children, it is common for them to be able to receive a share of a decedent’s property.

Most states do have laws to protect against accidental disinheritance, should a will predate the birth of a child and fail to be revised before the death of the relative. That way, if property isn’t left for one child but is left for their siblings, it’s assumed this omission was accidental and the child in question will be given an equal share. In some jurisdictions, these laws can also apply to grandchildren.

When an individual passes away without a will, their estate is considered “in intestacy.” This means that a court-appointed administrator will compile all of the deceased’s assets, pay any debts or taxes, and distribute what remains to the beneficiaries based on the laws of their state. A will may also be considered intestate if it is declared invalid for a variety of reasons. In either case, only the probate court with jurisdiction over the estate is responsible for distributing the deceased’s assets.

State-by-State Breakdown

Make sure you know which of these three systems of inheritance law governs your state. Here’s how each one works and might affect you.

Community Property

The first type of inheritance law is what’s known as community property. Under this system, each spouse automatically owns half of what they each earned while married. Ergo, when one person expires, half of their estate automatically goes to their partner, while the latter half may be distributed to other beneficiaries.

Of course, this is only a minimum requirement. If a will has been written, then the deceased had the option of reserving more than half of their assets for their spouse. According to our research, the nine community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

For the purposes of inheritance, community property laws consider income received from employment, property bought during the marriage (with income from work), and separate property that a spouse gives to the marriage community (and therefore will be obliged to share with their spouse) as being “shared” between partners (i.e., going toward each of their “halves” should the other pass away).

Property that doesn’t apply to this policy includes anything acquired prior to the marriage, inheritances or gifts, and anything covered under an agreement between the spouses that’s to be kept separate from the marriage community.

Common Law

Thirty-eight of the remaining 41 states operate under common law policies. In the context of inheritance, spouses living in these states aren’t automatically entitled to half of the assets obtained throughout the marriage.

That said, many states will still give the surviving spouse the right to claim a third or even half of the deceased’s estate, also regardless of the terms of the will. However, these provisions only apply if the surviving spouse petitions the court for their share. Under common law, the ownership of property is determined by the name on the title of the property or by whoever’s income was used to purchase it.

Elective Community Property

Three states don’t fit neatly into either of these two categories. Alaska, for instance, adopted an elective community property system in 1998. It’s still effectively a common law state, but a spouse may also have an automatic right to an inheritance, so long as they sign a written agreement with their partner or create a community property trust together.

Tennessee established a similar law in 2010, while Kentucky adopted its elective community property system in 2020. In each state, both residents and nonresidents may create community property through a community property trust.

The Bottom Line

The last thing anyone would want to deal with while mourning is complications in the inheritance process. As such, even though it isn’t fun to think about, it’s crucial to ensure that you have your affairs in order as soon as possible to avoid confusion and make sure that your will can be carried out as written. To that end, make certain you understand the inheritance laws of your state when planning for your estate. That will give you the best chance that your plan for your assets won’t be overridden.

How to determine inheritance if the intended beneficiary is deceased

If a Thrift Savings Plan account holder dies, his/her account will be inherited by his/her beneficiary. Participants can designate a beneficiary on Form TSP-3 (which can be found on the TSP website). If there is no designated beneficiary, the Thrift Plan follows the standard order of precedence for federal benefits.

That order is:
• Spouse;
• Child or children equally, with the share due any deceased child divided equally among that child’s descendants;
• Parents;
• Appointed executor or administrator of your estate;
• Next of kin who is entitled to your estate under the laws of the state in which you resided at the time of your death.

If your beneficiary is your spouse, and your TSP balance is $200 or more, the TSP will set up a beneficiary participant account in his/her name. Non-spousal beneficiaries are not allowed to keep their money in the Thrift Savings Plan. The owner of a beneficiary participant account will not be able to make any contributions to, borrow from, or transfer money into the inherited account. They will be able to withdraw from the account and to make interfund transfers.

Regardless of how your TSP account was invested, your spouse’s beneficiary participant account will be invested in the age-appropriate Lifecycle (L) Fund. Because beneficiary participants are allowed to make interfund transfers, they are free to reallocate the investments based on TSP rules.

In addition to this general information, there is specific information that applies to beneficiary participant accounts.

If your beneficiary has an existing TSP account of their own, they are allowed to transfer the beneficiary participant account into their personal TSP account. But wait; they can’t do the reverse! They cannot roll or transfer an existing TSP account (as well as an outside IRA or other retirement plan) into a beneficiary participant account.

There are other rules that deal with combining regular and beneficiary participant accounts. If there is a Roth balance in either account the “Roth initiation date” (this date is used to determine whether or not Roth earnings are qualified) would be the earliest date a Roth TSP was initiated, regardless of whether the date applies to the regular account or the beneficiary account.

If you are younger than 59 ½ at the time you inherit a beneficiary participant account, Roth rules bring up another caveat in deciding whether or not to combine it with your regular TSP account. With few exceptions, withdrawals taken prior to age 59 ½ in regular TSP accounts are subject to a 10% early withdrawal penalty. Beneficiary participant accounts have no such penalty.

Regarding withdrawals, the rules that apply to regular TSP accounts also apply to beneficiary participant accounts. When the withdrawal is a required minimum distribution RMD), the distribution is based on whether or not the deceased participant has reached their “required beginning date”. The required beginning date is April 1 of the year after the deceased participant would have turned 72 (70 ½ for those born prior to July 1, 1949).

If the participant died before his/her required beginning date, the beneficiary must begin receiving RMDs by whichever is later, December 31 of the year in which the deceased participant would have turned 72 or December 31 of the year following the year in which the participant died. The amount of these RMDs will be based on the age of the beneficiary participant.

On the other hand, if the participant died on or after their required beginning date, the beneficiary would have to begin receiving RMDs by December 31 of the year the participant died (unless, of course, the participant had already received their RMD prior to their death. In this case, the first year’s RMD would be based on the age of the deceased participant, while subsequent year RMDs would be based on the age of the beneficiary.

What happens when a beneficiary participant dies? The money cannot remain in the Thrift Savings Plan. The payments must be made directly to those who the beneficiary participant designated as his/her beneficiaries. In addition, the money cannot be rolled over into an IRA or other retirement account. This could result in a major tax liability for the beneficiary of a beneficiary participant. Unless there is a strong reason (e.g., the beneficiary participant is under 59 ½), it would be best for the beneficiary participant to combine the beneficiary participant account with their regular account (if they have one), or to roll it over into an IRA.

Everything that is in this article, and more, can be found in the TSP’s helpful booklet, Your TSP Account: A Guide for Beneficiary Participants https://www.tsp.gov/publications/tspbk33.pdf.

What it Takes to Be a TSP Millionaire in Today’s Dollars
With a long enough timeline, involving consistent large contributions and decent long-term stock returns during the period, it’s possible to become a millionaire from compounding a middle-class or upper middle-class income, including most jobs in federal service.

The Latin term per stirpes is commonly used in estate planning to describe how a person making a will would like his assets to be distributed. In case a family beneficiary dies before the will’s owner, a per stirpes distribution means that person’s portion of the assets go directly to that beneficiary’s heirs. There are other options if the will’s owner (called a “testator”) does not want his assets to be distributed this way. To explore this concept, consider the following per stirpes definition.

Definition of Per Stirpes

Pronounced

Adjective/Adverb

  1. By familial stocks, or by each branch of a family
  2. By equal shares to a deceased person’s beneficiaries

Origin

1675-1685 Latin per stirpes (literally: by stocks)

Per Stirpes in Estate Planning

When making out a will, the testator should consider where he wants his assets to go should a named beneficiary die before him. It is common for that deceased beneficiary’s inheritance to go to his or her children, which is a per stirpes distribution. The testator has the ability to specify how such an inheritance will be distributed in this situation. For instance, rather than being distributed to the deceased beneficiary’s children, the he might specify that the inheritance goes back into the pot, to be shared equally among the original remaining beneficiaries.

Example of Per Stirpes Distribution

George, who has carefully managed his finances all of his life, is making out a will for the distribution of his $1.5 million estate after his death. George specifies that his wife, if she is still living upon his death, will get 50% of his assets, and the remaining estate will be divided equally among their four adult children, named in the will as Donald, Arthur, Samantha, and Edward, per stirpes.

Ten years later, when George passes away, his wife inherits $800,000, and the remaining $700,000 is supposed to be divided among the adult children. Unfortunately, the couple’s son, Donald, had been killed in an auto accident about a year prior to George’s death. Because George made a per stirpes distribution, Donald’s share is divided equally among his children.

Example of Non-Per Stirpes Distribution

If, on the other hand, George had specified that his estate would be divided among his children per capita, which means “for each person,” Donald’s portion of the estate would not flow down to his children. Instead, his portion would remain part of the assets left to George’s children. This entire amount would then be evenly divided among the three living children. Arthur, Samantha, and Edward would inherit about $233,000 each, instead of the $175,000 they would have received had Donald still lived.

Use of Per Stirpes Language in Modern Wills

When making out a will, the testator has the right to give away his assets in any way he chooses. He can name specific people or organizations, to receive all or a portion of his assets. He is free to determine where those same assets will go should one of those beneficiaries be deceased, or otherwise unable to receive the assets, when the will goes into effect. The most common line of distribution is per stirpes, as it just makes sense that a deceased beneficiary’s family receive the money intended for him or her.

This can become a complex issue, making it a good idea to consult with an estate planning attorney, who can prepare a will and other estate planning documents, ensuring the estate goes to the right beneficiaries with the least amount of confusion. Many legal professionals are moving away from old fashioned terms, like per stirpes, and per capita, because they can be confusing, or even misused. It is not required that any person use complicated language or Latin terms in their will. Simple, clear language specifying which assets should be given to which people is perfectly legal.

To ensure that those assets are distributed according to the testator’s desires, it is important to include alternative plans, should one of the original beneficiaries be unable to receive his inheritance. This normally happens by death of a beneficiary, but the testator may also choose to withhold assets if a beneficiary does not meet some specific test. For instance, if an adult child beneficiary fails to attend college, which is a requirement specified in the will, the testator may specify that his inheritance go to someone else.

Examples of Per Stirpes Distribution

  1. Roger has three children, Nathan, Emilia, and Alice. Roger passes away, and all three of his children are still living. Because of his per stirpes distribution in Roger’s will, each of his children will receive one-third of his estate. Of Roger’s $3 million estate, Nathan, Emilia, and Alice will each receive $1 million.
  2. Roger has three children, Nathan, Emilia, and Alice. Roger passes away, but his daughter, Alice had passed away a year before, leaving behind two children (Roger’s grandchildren). Nathan and Emilia will each receive one-third of Roger’s estate, and Alice’s children will each receive one-half of Alice’s share. Of Roger’s $3 million estate, Nathan and Emilia will each receive $1 million, and Alice’s children will each receive $500,000.
  3. Roger has three children, Nathan, Emilia, and Alice. Roger passes away, but his daughter, Alice had passed away a year before. Alice had no children. Alice’s share will remain in the pot, to be divided equally between Nathan and Emilia. This means that Nathan and Emilia will each receive one-half of Roger’s estate. Of Roger’s $3 million estate, Nathan and Emilia will each receive $1.5 million.

Related Legal Terms and Issues

  • Assets – Property or finances owned by an individual or entity, and regarded as having value.
  • Beneficiary – A person designated as the recipient of money or other assets under a will, trust, insurance policy, etc.
  • Estate Planning – The process of arranging, during one’s life, for the disposition of his assets upon his death.
  • Heir – A person who, by right of inheritance, inherits the assets of a deceased person.
  • Will – A legal document in which a person specifies who should receive his assets upon his death.

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How to determine inheritance if the intended beneficiary is deceased

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Settling an estate is never an easy matter, even if the deceased left a will and his estate entered probate. When a home is inherited jointly by more than one heir, that process can become much more difficult, as the home will need to be sold for all heirs to liquidate their share of their inheritance. While some heirs choose to place the property on the market and split the proceeds, sometimes an heir wishes to hold onto the home, purchasing the others’ share of the property. To do this fairly, you’ll need a fair evaluation of the home’s fair market value.

Consult the county clerk’s office to determine the value of the home the last time it was assessed. While assessments that haven’t been adjusted in years aren’t much use to determining its value, the Internal Revenue Service allows heirs to use the home’s assessed value on the date of the prior owner’s death as its value at inheritance. Because of California’s parent-child reassessment exclusion, if you inherit a home from your parent, it isn’t automatically reassessed, so the assessment may not be up to date.

Hire a professional real estate appraiser to determine the home’s value. An appraiser can determine the value of the home on the date you and the other heirs inherited it as well as its current value. If you and the other heirs held the home for a lengthy time before you planned your buyout, its value may have changed significantly since you owned it.

Determine which valuation method you wish to use to when you purchase the home, but consider the tax ramifications to the other heirs. If you purchase it for an artificially depressed assessed value, the IRS may consider the undervalued portion a gift to you from your other heirs, and they’ll owe gift taxes on the amount. If you purchase the home for more than its value on the date of the deceased’s death, the other heirs will face capital gains taxes on their share of the amount above its value upon inheritance.

Have you inherited a 401(k) plan? Understanding the various considerations involved can help minimize your tax liability and maximize your inheritance.

by Edward A. Haman, Esq.
updated May 02, 2022 · 4 min read

If you’ve inherited a 401(k) plan, you need to understand the tax implications. The 401(k) inheritance tax rules vary depending upon factors such as your relationship to the deceased person, when you withdraw money, and your age. When you may—or must—withdraw money from the 401(k) also depends upon the rules of the particular plan.

How to determine inheritance if the intended beneficiary is deceased

Plan Documents

The inheritance of a 401(k) plan is determined by how the plan was set up by the decedent, or person who has passed away, not by the decedent’s will. Unless a spouse signs a waiver, they must be named as the plan holder’s beneficiary. If a waiver is signed or the decedent is not married, one or more other individuals can be named as beneficiaries. A trust may also be designated as a beneficiary, in which case the terms of the trust determine the distribution.

Review the 401(k) plan documents to see if the inherited funds must be withdrawn immediately or can be withdrawn in smaller amounts over time. Many plans require a lump-sum withdrawal of the funds so that plan administrators don’t have to maintain an account for a beneficiary. However, some plans allow the beneficiary to withdraw the funds over a period of five years or even longer, based upon the beneficiary’s life expectancy.

Estate and Income Taxes

If the value of the decedent’s estate exceeds a certain amount, it becomes subject to the federal estate tax, which changes annually. For 2018, the estate must exceed $1.18 million in order for the tax to come into play. For 2019, the estate must exceed $1.4 million. There may also be a state inheritance or estate tax.

Income tax is owed when funds are withdrawn from a 401(k) or an individual retirement account that is not a Roth IRA (individual retirement account). If the plan is a Roth 401(k), different tax rules apply because taxes were paid on the funds before they went into the plan.

For most people, it is advantageous to delay the withdrawal of funds in order to minimize the tax liability. If the 401(k) plan requires a lump-sum withdrawal, the beneficiary is subject to tax on the full amount in the plan. If the plan allows for withdrawal over a five-year period, the tax obligation can be spread out over five years. If the funds can remain in the plan or be rolled over into another plan or an IRA, the tax obligation can be spread out even longer.

Surviving Spouse

A surviving spouse may have three options:

  1. Leave the funds in the inherited 401(k) plan, if permitted.
  2. Roll the funds into their own 401(k), if their plan allows. Ideally, this should be a direct rollover from one 401(k) to another. Any rollover checks must be deposited within 60 days and are subject to Internal Revenue Service (IRS) withholding rules.
  3. Roll the funds into an IRA, either your own or an inherited account. Again, this should be done as a direct rollover. If you leave funds in the decedent’s plan, the decedent’s beneficiary designations apply. If you roll the funds into an inherited IRA or into your own 401(k) or IRA, you can name your own beneficiaries.

A person with a 401(k) or an IRA is required to begin withdrawing funds at age 70 ½. The least amount that must be withdrawn under federal law is called the required minimum distribution (RMD). How this applies to a surviving spouse depends upon the ages of the surviving spouse and the decedent, as well as whether the surviving spouse leaves the funds in the decedent’s plan, rolls them over into an inherited IRA, or rolls them over into their own 401(k) or IRA. You may always withdraw more than the applicable RMD.

The analysis is dependent upon whether the decedent had reached age 70 ½. It is also different if the surviving spouse is over age 70 ½, is between the ages of 59 ½ and 70 ½, or is under age 59 ½.

Other Beneficiaries

A beneficiary who is not the surviving spouse may have two options:

  1. Leave the funds in the inherited 401(k) plan, if permitted.
  2. Roll the funds into an inherited IRA. If you leave funds in the decedent’s plan, the decedent’s beneficiary designations apply. If you roll the funds into an inherited IRA, you can name your own beneficiaries.

As with a surviving spouse, the RMD rules that apply vary depending upon whether the decedent was over or under age 70 ½.

Tax laws are complicated and always subject to change. Consulting with a tax professional can help minimize your tax obligations, especially if the inherited plan contains company stock. In addition to the advice of a tax professional, more information can also be obtained from an online service provider.

How to determine inheritance if the intended beneficiary is deceased

For an inherited IRA, “basis” means the amount on which the decedent paid taxes.

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Inheriting an individual retirement arrangement can be both a blessing and a curse. Although you get access to the account and can take distributions without paying any early-withdrawal penalties, you often have to pay taxes on all or some of the distributions. However, if you know the basis in the account – or amount of nondeductible contributions – you avoid any potential for double taxation.

With regards to an IRA, the basis refers to whether or not nondeductible contributions were made to the account.

Evaluating Relationships to the Decedent

When you inherit an IRA, your basis in the account is the same as the decedent’s basis. For traditional IRAs, that’s the amount of any nondeductible contributions made to the account. For Roth IRAs, the basis equals the amount of total contributions, because all Roth IRA contributions are nondeductible.

For example, if the decedent had a $20,000 basis in his traditional IRA because over the years he made $20,000 of nondeductible contributions to the account, your basis is $20,000.

Significance of Basis

The basis of an inherited IRA is significant because it often determines whether you will pay taxes on all or a portion of your distributions from the account. Knowing the basis in the account allows you to avoid paying taxes on money that has already been taxed. If the decedent made nondeductible contributions to a traditional IRA, the decedent has already paid taxes on that money. If you are unaware of the decedent’s basis in the IRA, you’ll pay taxes on all of the distributions from the account, including the money that was already taxed.

Taxability of Traditional Distributions

If the decedent had a basis in a traditional IRA from making nondeductible contributions, you have to figure the tax-free portion each time you take a distribution. Divide the basis of the IRA by the value of the IRA at the time you take the distribution to figure the tax-free percentage. Then multiply the percentage by the amount of the distribution. Finally, subtract the tax-free portion from the old basis to find the remaining basis.

For example, say you inherit a traditional IRA with a basis of $20,000 and you take a $10,000 distribution when it is worth $100,000. The tax-free portion of the distribution equals 20 percent, or $2,000. Your remaining basis in the account is $18,000.

Taxability of Roth Distributions

Unlike a traditional IRA, contributions to a Roth IRA are not deductible by the account owner. That also means withdrawals are tax-free. If the decedent made her first Roth IRA contribution to the account at least five years before she died, the basis doesn’t matter, because all of the distributions come out tax-free. However, if the Roth IRA is less than 5 years old, basis matters. When taking distributions, you first remove the basis tax-free. Only after you’ve removed all of the basis are the distributions of the remaining earnings taxable.

Protecting your loved ones requires establishing an effective estate plan that ensures that your assets are distributed according to your wishes while easing the tax burden on your heirs. When you created your estate plan, you no doubt made the assumption that your beneficiaries will live longer than you. However, it is sometimes the case that a primary beneficiary dies first, which gives rise to various questions, including who stands to inherit assets designated for the deceased beneficiary.

This is just one of the complexities of estate planning that requires the help of a knowledgeable and experienced legal professional. Reach out to Brady, McFarland & Lord, LLC, and our Longmont estate planning attorney for questions regarding all facets of estate planning, from gift and estate taxes to probate and trust settlement.

The Death of a Beneficiary – Ramifications on Wills and Trusts

When a primary beneficiary—which is essentially a chosen heir—dies prior to the estate creator’s death, then problems can arise if the estate plan does not list a contingent beneficiary. This designee may also be known as a second-in-line beneficiary.

Most estate plans are thorough and include contingencies in the event that a primary beneficiary predeceases the estate plan’s creator. However, if the contingent beneficiary is not mentioned in the original estate documents, it is possible for the person who created the will or the trust to amend their estate plan to add the new beneficiary’s information.

Per Stirpes Passage of Inheritance

Another method for naming beneficiaries when planning an estate is what is known as “per stirpes,” which translates to “by branch” in Latin. A designation of “per stirpes” simply means that if a beneficiary dies prior to the estate creator’s passing, then the beneficiary’s share of the estate automatically goes to the beneficiary’s offspring. In this setup, other named beneficiaries receive the portion of the inheritance intended for them, while the deceased beneficiary’s portion goes to his/her heirs in equal parts. For example, if the deceased beneficiary has two children, both children would receive 50 percent of their estate.

No Beneficiaries Remaining: What Happens Then?

Although rare, an estate planner may also suggest planning for the unlikely scenario that an entire family passes away at once—due to a plane crash, for example. A common disaster distribution plan allows the estate’s creator to determine what will become of the assets in the estate if such an occurrence happens. Commonly, estates may fall to the closest living relatives—also known as heirs-at-law. In other cases, the testator may decide to designate that the estate is given in whole or part to one or more charities or other causes to which they are affiliated.

Protect Your Legacy

At Brady, McFarland & Lord, LLC, our estate & business planning lawyers in Colorado are ready to help you create the right estate plan for you and your family. Our team has a broad range of experience helping clients set up trusts, conservatorships, and guardianships, and we offer help with estate and Medicaid planning. Schedule an appointment to discuss your needs with our caring, compassionate staff.