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Laws regarding IRA transfers may change for Washington residents

Residents in the Seattle area who are concerned with matters of estate planning may have been following recent news reports regarding inherited individual retirement accounts. Max Baucus, the U.S. Senate Finance Committee Chairman, has proposed tougher requirements on IRA transfers to beneficiaries, although he said he would hold back for now on an effort to change the laws regarding inheritance.

The proposed changes, which could greatly alter retirement and estate planning, would require younger beneficiaries to pay taxes over the course of five years instead of making the payments over the rest of their lives. The chairman's proposal is meant to stop a tax-planning method that allows many Washington residents to accumulate tax-deferred gains within IRAs.

Under the current law, the holder of an inherited IRA is permitted to receive the required taxable distributions throughout the course of his or her anticipated lifespan. However, the committee chairman says the law is being abused by some taxpayers who give tax-free assets to future beneficiaries.

In addition, the proposal includes exceptions for beneficiaries whose age is within 10 years of that of the account owner. Exceptions would also apply for disabled or chronically ill individuals, as well as for an account owner's spouse. The new law would also make children exempt from the five-year rule until they become adults.

The proposal would go into effect for individuals who pass away in 2013 and onward.

Readers in the Seattle area who are currently planning their estates will want to stay abreast of any changes to the law regarding IRAs. If the new proposal takes effect, some estate planning techniques will have to change considerably, and being aware of the current laws will ensure full compliance in IRA transfers.

Source: Bloomberg, "Sen. Baucus Eyes Inherited IRAs for $4.6B," Richard Rubin, Feb. 7, 2012

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