After an individual dies, his estate must be administered. Many people call estate administration “probate,” but probate is only one small part of estate administration.

Estate administration involves admitting the last will and testament of the decedent to probate, gathering up all of the decedent’s assets into an estate account, paying all of the decedent’s debts and the debts of his estate, accounting to the beneficiaries of the estate, and distributing the assets of the estate. In short, estate administration is a winding down of the decedent’s affairs.

There is no shortage of mistakes that an individual can make in administering a decedent’s estate. The process is not simple. It is my firm belief that many people act as the executor of an estate, make numerous mistakes, and neither they nor the beneficiaries of the estate are every the wiser about the mistakes that were made.

In this article, I’m going to discuss common mistakes that can occur with tax-deferred assets, such as individual retirement accounts (IRA), bonds, and annuities. All of these assets have accrued income on which the decedent did not pay income tax. When the money is removed from the account, income tax issues are implicated.

The first issue with these accounts is the fact that the accounts are includible in the decedent’s estate for purposes of calculating any estate tax that may be due on his estate, and when the income is removed from the account, the beneficiary must pay income tax on the money removed from the account. For this reason, many people say that these assets are subject to a double taxation.

Since the decedent did not pay income tax on the money in the IRA and on the interest that has accrued on the bonds and the annuity, the beneficiary of these assets must pay income tax on the money when it is removed from the account. When the beneficiary removes the money from the account (the IRA, the bond, the annuity), his income for the year will increase.

Sometimes, the increase in the beneficiary’s income can be significant. For instance, an IRA worth $150,000 will result in $150,000 of extra income to the beneficiary if the beneficiary removes all of the money from the IRA in one year. A US savings bond might have significant deferred income built up inside of it. By surrendering the bond, the beneficiary will have to report this income. Similarly, if a deferred annuity (an annuity on which taxation of the accrued income is deferred until the income is removed from the account) is surrendered, the beneficiary will have to report all the income that has built up in the annuity on his tax return.

This income could easily push the beneficiary into a much higher tax bracket. The income may also disqualify the beneficiary for certain means-tested benefits, such as a homestead rebate or other subsidies that he may receive. The higher income may cause the beneficiary to pay higher Medicare premiums.

There are a number of negative implications that can result when an individual imprudently removes money from inherited accounts. As the executor of an estate, and even as the beneficiary of an estate, you need to be mindful of these implications. While it’s certainly nice to receive an inheritance, there are smart ways and not-so smart ways in which to accept the inheritance.