If you don't like working through that very good graphic posted above, here's the basics:
1) You can take the RMD (Required Minimum Distribution) to lessen the hurt of paying taxes. Vanguard's website has a quickie summary of your options, and it's worth the read. You shouldn't take a lump sum distribution unless you are prepared for the possible consequences, which means consulting a tax advisor and possibly even a fiduciary financial advisor. Google "inheriting IRA non-spouse" and it'll come up.
2) you also MUST title this account properly. It is your legal responsibility to get it right, not the financial institution's responsibility. It cannot be rolled over (into your own IRA) without you paying income taxes on the whole amount. You can change which financial institution holds the funds, but the account should have its title changed no matter what. See http://www.retirementwatch.com/IRASample1.cfm
HTH! Me, I'd pay off the credit card debt and consider the rest a jump on retirement savings. Your kids can get a loan for education, but nobody gives you a loan to retire, LOL. I would worry a lot less about 'being underwater' on RE loans as long as you can make the payments – been there, done that, and you have time to outwait the down markets.