Patinelli & Chang, LLP

IRA Inheritance Options

Deciding who should inherit your retirement account is an important part of estate planning. You have several options that are available.

When many people pass away, they will still have a lot of money in their individual retirement accounts for a beneficiary to inherit. It is important to decide who that beneficiary will be, in a way that fits your overall estate plan.

The IRA can be used to balance out other bequests and can be used to enhance other estate planning goals. Depending on what you decide to do, there are various tax implications, which Morningstar recently discussed in "Who Should Inherit Your IRA?"

Options include:

·         Spouse - If your spouse is the beneficiary, he or she can roll your IRA into their own. However, it might 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 the IRA, then they can stretch the benefits out over their own lifetimes.  However, as a practical matter, few do so because they need the money.

·         Charity - Your estate can get a tax deduction, if you leave your IRA to a charity. It can be complicated, so get expert advice before filing out a beneficiary designation form.

·         Your estate - There is not much benefit to naming your estate as the beneficiary. However, if you cannot decide on another option, you can do so.

·         A trust - Ordinarily, there is no benefit to leaving your IRA to a trust. However, if the beneficiary would otherwise be a minor child or unable to manage their finances, it might be necessary to do so.

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

Naming Your Trust the Beneficiary of Your IRA in Torrance CA

If you have a trust and would like to make it the beneficiary of your IRA instead of an individual, you can do so. However, there are some important things to consider before doing so.

When people get trusts, one of the first things they are told is that they should put all of their important assets into the trust. They are often told that they can designate their trusts as beneficiaries of their life insurance policies and retirement accounts, and that they should consider doing so.

However, for tax purposes, it is not always a good idea to designate a trust as the beneficiary of your IRA, as Financial Advisor explains 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 or face tax consequences. This requirement does not go away when the beneficiary is a trust and not an individual.

Satisfying the requirement with a trust can get technical.

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 be an identifiable individual. Therefore, the beneficiaries who would automatically receive the trust assets when a previous beneficiary passes away, must be an identifiable individual.

This can be an issue if a residual clause in the trust includes giving assets to a charity, for example.

That is not the only complication with designating a trust as the beneficiary of an IRA. There are other potential problems, which is why you should consult with an estate planning attorney before doing so.

Reference: Financial Advisor (Dec. 2, 2016) "Is Naming A Trust As Beneficiary Of A Client's IRA A Good Idea?