Q. My IRA is a significant part of my assets, and I wonder if there are any special considerations when planning my affairs?
Name Beneficiaries: Remember to name both primary and contingent beneficiaries. If you are married, the primary beneficiary would typically be your spouse, but name back-up beneficiaries as well. If you and your spouse were to die around the same time, or if your spouse predeceased you and you had neglected to name contingent beneficiaries, your IRA would then go to your estate and be subject to probate.
“Stretch” Your IRA: If you do not need the funds in your IRA for retirement, but would rather preserve them for the younger beneficiaries, consider “stretching” your IRA: defer the start of your own minimum required distributions (“MRD’s”) until age 70.5, your mandatory start date, and then take out only the required minimums each year thereby leaving more in your IRA to grow tax-deferred. When you die, your beneficiary can stretch distributions over his or her lifetime and even designate a second-generation beneficiary to continue the MRD’s. The younger the beneficiary, the smaller each distribution can be under IRS rules, allowing the remaining funds to grow tax-deferred. This is called “stretching” an IRA and can result in several generations enjoying the fruits of your IRA legacy. However, make sure that your IRA custodian permits your first and second-generation beneficiaries to stretch-out their own distributions and also permits them to name their own beneficiaries. If yours does not, you might consider moving your IRA to a new custodian who is friendly to the stretch option.
If Beneficiary Is a Spouse: If you are married, let your spouse know that he or she has options: upon your demise, he or she can either (a) roll your IRA over into his or her own IRA and defer the start of (“MRD’s”) until your spouse’s own age 70.5, or (b) transfer the funds to an inherited IRA and begin MRD’s within a year of when you would have turned age 70.5. In either case, your spouse can choose to “stretch” the MRD’s over his or her own lifetime, thereby allowing the IRA to grow for the later benefit of downstream beneficiaries, e.g. your children. Another option: if your spouse doesn’t need the IRA to live on, he or she can disclaim all or part of it, allowing that portion to pass immediately to your children who can then stretch the MRD’s over their longer lifetimes.
Designate Separate Accounts for Each Beneficiary. If you designate, say, your three children as your contingent beneficiaries, you should direct your IRA custodian to create a separate account for each child when distributions begin. Otherwise, the MRD’s will be based upon the life expectancy of the oldest child, thereby undermining the stretch option for the younger children.
Trust As Beneficiary? : In most cases, a trust would not be named as a primary beneficiary, but might be named as a contingent beneficiary. However, if your IRA is large or if you have special reasons for not wanting your beneficiaries to have unrestricted access to the IRA funds, you might ask your attorney to create a special trust, sometimes called a “conduit trust”, to be the primary beneficiary of your IRA.
An IRA can be a valuable part of your estate plan, but the rules are complicated. Consult with your financial advisor and your attorney to learn your options and encourage your beneficiaries to do likewise down the road.