Legal Update: Taxation & Estate Planning

Proposed Changes to Treatment of Inherited IRAs Dies in Committee

by Ryan Barry

Montana Senator Max Baucus, who serves as chairman of the Senate Finance Committee, recently introduced legislation including language that would drastically alter treatment of inherited IRAs for taxation and estate planning purposes.  Under current law, those inheriting retirement accounts may generally choose between receiving a lump-sum payment of account funds or, alternatively, receiving distributions from the account across the heir’s lifetime.  Spreading payments out over an heir’s lifetime reduces the size of taxable distributions and permits inherited accounts to grow without immediate tax consequences.  Under Senator Baucus’s proposal, heirs would no longer be allowed to stretch disbursement of inherited retirement accounts over the heir’s lifetime.  Instead, the bill would allow heirs only five (5) years to empty such accounts, which would likely increase the size of taxable distributions and the income tax payable as a result. 

Soon after introducing his proposal, Baucus removed the language dealing with inherited retirement accounts.  Nevertheless, he was quick to note that such accounts would likely “be taken up in tax reform” at a later date.  Chambliss will continue to monitor the development of legislation surrounding inherited retirement accounts and will post updates as they become available.