Estate Tax

• The value of the IRA is counted when determining the entire estate value. The entire estate value is the amount used to calculate federal estate transfer taxes. It does not matter who the named beneficiary is; the person can be completely unrelated to you or any other heirs receiving money from the rest of your mom's estate. The beneficiary is not responsible for calculating or paying the estate transfer tax. The estate may ask for funds from the beneficiary, but the beneficiary is not required to use inherited IRA assets to pay the transfer tax. IRAs avoid probate and the funds are distributed upon request and deliverance of a death certificate.
  
  

Income Tax

• The beneficiary is responsible for paying income taxes on money distributed from an inherited IRA. Beneficiaries can choose to take a lump-sum distribution or take payments over five years. Additionally, if your mom was receiving required mandatory distributions, the beneficiary can roll the IRA into a beneficiary IRA. This allows the beneficiary to keep the IRA, taking RMD distributions based on her younger age, extending the IRA value over years, maybe even decades. Stretching the IRA payments over years reduces the income taxes owed in any one year. If the IRA is a Roth, there is no tax owed on beneficiary distributions. Beneficiaries can choose to stretch Roth IRAs to continue tax free growth.
  
  

State Taxes

• Every state has a different transfer tax regulation. Speak with the probate trustee or a tax adviser in the state where your mom resided to determine the tax consequences, if any, on a state level. When adding federal, income and state taxes, it is possible that a large IRA will pay more than 55 percent of the value in taxes one way or another.
  
  

Creditor Protection

• Because IRAs avoid probate, the money never goes into the estate closing account. This means debts your mother owed are not subject to a creditor lien. Funeral expenses, mortgage debts and federal taxes are not the liability of the beneficiary inheriting your mother's IRA. For example, you mom could leave the IRA to your daughter as a college fund while leaving everything else to you and your brother. If all mom's estate has a large tax liability, you are not authorized to take the money that has been given to your daughter to pay the taxes.