Choosing an IRA Beneficiary

An Integral Step in Estate Planning – Choosing an IRA Beneficiary

Many readers hold the majority of their investments in an Individual Retirement Account (IRA). A common oversight is to forget to name a benefactor of the account. While there are many factors involved in estate planning, the designation of an appropriate IRA beneficiary is among the most important. Choosing an improper IRA beneficiary may result in the unnecessary taxation of your heirs once you’re gone. Being aware of a few important factors when completing your IRA beneficiary form will make sure more of your money ends up in the hands of your loved ones and that less ends up with Uncle Sam. So, let’s take a look at these factors in greater detail.

Naming Contingent Beneficiaries

Naming a contingent beneficiary, as a kind of ‘back­up’, will help you to avoid the problems resulting from the premature death of your primary beneficiary. In most cases, without a designated beneficiary, your estate will become the default beneficiary, which may result in the unfavorable taxation of your benefits. The reason being, any IRA distributions being paid to an estate must be distributed:

1. Within 5 years of your death, if deceased before the required beginning date (RBD) or,

2. During your remaining single life expectancy, if deceased after the (RBD). On the other hand, if your IRA is made payable to an individual, or certain trusts, the distribution of the inheritance can be controlled, resulting in more favorable taxation. Most plans allow any individual or trust beneficiary the option to receive their inheritance through required minimum distributions RMDs. RMDs pay out benefits in more manageable sums over the life expectancy of the individual or trust. Estates are also unfavorable because they require far less taxable income than an individual before winding up in a higher tax bracket.

The IRA tax rules are very complicated. So, it is very important for readers to understand and pay close attention to them when choosing your beneficiaries.

Naming Multiple Beneficiaries

There are several factors to consider when naming multiple beneficiaries. First off, the required minimum distribution (RMD) of your IRA is determined by the oldest beneficiaries life expectancy. In order to avoid this, your IRA must be directed into separate accounts, established for each individual, by September 30th of the year following your death. This way, the RMD for each beneficiary will be calculated by his/her own life expectancy, which is usually preferable. Also important, is the clear specification of how you would like to allocate the inheritance of any benefactor predeceasing you. Most IRA custodian agreements, unless otherwise specified, will split these benefits equally among the beneficiaries contained in the agreement. If you would like the inheritance of a predeceased beneficiary to be given to his/her children, it is very important to state this clearly on your IRA beneficiary designation form.

Naming a Living Trust As a Beneficiary

A common problem encountered when naming a living trust as a beneficiary, occurs in the drawing of the document itself. An improperly drawn trust agreement can cause a laundry list of legal problems. In some cases, the entire balance of the trust will have to be withdrawn within 5 years of your death. Also, to avoid an increased rate of taxation, the provisions regarding the division of trust assets must be drawn up properly. It is best to seek out the help of top legal talent when setting it up. It’s a one time event so it’s advisable not to seek out the lowest priced option because the ramifications of an improperly drawn up living trust can be huge. When hiring an attorney you usually get what you pay for as is evidenced by the stellar results of stars like David Boies and John Keker.

Keep in mind, even if your trust is set to divide into separate shares at the time of your death, the IRA minimum distribution rules do not apply to it, and it is considered a single beneficiary. If you would like multiple benefactors in trust, you must set up separate trusts for each and using IRA beneficiary designation form, make each trust a benefactor.