Varian Law LLC

Choosing the Beneficiaries of Your IRAs is Critical

How you decide to distribute your IRAs can be a major enhancement to your estate plan.

IRAs can be used as a way to balance out other bequests, and they can also be used to support other estate planning goals. However, there are also many tax implications to consider when choosing your IRA beneficiaries, according to  Morningstar in "Who Should Inherit Your IRA?"

Among your options are to distribute your IRA to your ....

• Spouse - If your spouse is the beneficiary, he or she can roll your IRA into their own. However, it may not make sense to designate a spouse if they are nearing the age of having to take required minimum distributions and will not need the money.
• Child or Grandchild - If they inherit your IRA, then they can stretch the benefits out over their own lifetimes.
• Favorite Charity - Your estate can get a tax deduction if you leave your IRA to a charity. However, it can be complicated, so get professional advice before doing so.
• Estate - Although a simple and easy approach, there is usually not much benefit to naming your Estate as the beneficiary of your IRA.
• Trust - Leaving your IRA to a Trust can be very complicated if you want to avoid adverse tax consequences, but leaving your IRA to a Trust can also achieve significant advantages.

Completing your beneficiary forms is as important and critical as completing your Will, and should be done with the advice and assistance of an experienced estate planning attorney.

Reference: Morningstar (March 2, 2018) "Who Should Inherit Your IRA?"

Who Should Inherit Your Retirement Plans/IRAs?

The decision is usually made quickly and without much thought.

People instinctively write down their spouse, their children, parents or siblings when deciding the beneficiary of a retirement plan or IRA.  However, that may not be the best decision, and you should carefully considered your options, according to Morningstar in "Who Should Inherit Your IRA?"

If an IRA is consistently paid into and wisely invested, it can grow to be of tremendous value and sometimes your biggest asset. Therefore, the beneficiary of your IRA is a very important decision.

Since there are different tax implications for different types of beneficiaries,  you should consult with an estate planning attorney when choosing a beneficiary.  Doing so will help ensure that your IRA, and the rest of your estate, can be distributed to your beneficiaries in a way that is fair for everybody and has the fewest negative implications for everyone.

Beneficiary designations are a critical part of your overall estate planning.

An experienced estate planning attorney can advise you on creating an estate plan that fits your unique circumstances.

Reference: Morningstar (Sep. 10, 2017) "Who Should Inherit Your IRA?"

Inheriting an IRA

If you inherit an IRA, you need to carefully consider your options and tax consequences.

Americans hold a staggering amount of wealth in individual retirement accounts ("IRAs").

That means that many people who have IRAs will eventually pass them on to their beneficiaries.

While that can be great news for those who inherit the accounts, it can also turn to bad news if the beneficiaries make the wrong decisions about what to do with those accounts.

Recently, Forbes discussed what some possibilities are for beneficiaries in "What To Do If You Inherit an IRA."

The single most important thing to keep in mind is that an Inherited IRA can be the source of lifetime payments or it can be a source of a very large and immediate income tax bill.

If you are smart, then you will want it to be the former, unless you absolutely need a large sum of money right away.

The general rule of thumb is that you should never take more out of an Inherited IRA than you are absolutely required to take by law. It is recommended that you take no more than the required minimum distributions.  Exactly how much that is will depend on several factors and a complex set of rules.

That is why you should never make a decision about what to do with an Inherited IRA without seeking the advice of an experienced estate planning attorney or accountant.

Reference: Forbes (July 10, 2017) "What To Do If You Inherit an IRA."

Can an IRA Go into Your Trust?

Careful consideration should be given to whether you make a Trust the beneficiary of your IRA or other Qualified Plan.

For income tax tax purposes, it may not always be a good idea to designate a Trust as the beneficiary of your IRA, according to the Financial Advisor in "Is Naming A Trust As Beneficiary Of A Client's IRA A Good Idea?"

The biggest and most important issue is that IRA beneficiaries must take required minimum distributions ("RMD") or face adverse income tax consequences. This RMD requirement does not go away when the beneficiary is a Trust and not an individual.  However, satisfying the RMD requirements with a Trust as beneficiary can get very complicated.

For example, every beneficiary of the Trust must be identifiable and must be an individual. While that might seem easy to accomplish, it is not always the case. Every successive beneficiary must also be an identifiable individual. Therefore, the beneficiaries who would receive the Trust assets when a previous beneficiary passes away must also be an identifiable individual.  This can become an issue if a residual clause in the Trust includes giving assets to a charity.

That is not the only complication with designating a Trust as the beneficiary of an IRA.  However, significant advantages and benefits can be achieved by designating a Trust as the beneficiary of an IRA or Qualified Plan that cannot be achieved by naming an individual as beneficiary.

A qualified estate planning attorney with knowledge of the complex rules which govern distributions from Qualified Plans and IRAs (e.g., the post-death RMD rules) can guide you in creating a Trust that fits your unique circumstances and accomplishes all of your goals.