Inheriting a Retirement Account

You’ve done your homework and established a trust as the cornerstone of your legacy planning. The trust is funded with your real estate along with all your bank and investment accounts and your personal property has been assigned over to the trust. What about your beneficiary designated accounts? Your life insurance? Your retirement accounts? Do you name your trust as the beneficiary? For now we will focus on your retirement accounts.

1.   The objective of the beneficiary designation (for most) is to ensure that the assets in the IRA remain tax deferred as long as possible and can be “stretched” over the life expectancy of the beneficiaries.

2.   Name your spouse as the primary beneficiary. Spouses have more options than other beneficiaries when inheriting IRA’s from each other. Mainly, your surviving spouse can “roll over” your tax-deferred account into his/her own IRA, further delaying income taxes until he/she must start taking required minimum distributions on April 1 after turning age 701/2. Subsequently, your spouse can then name your adult children or grandchildren as beneficiaries extending the income for the next generation.

3.   If your contingent beneficiaries are minor children, have special needs, are spendthrifts or are involved in a difficult marital situation, naming your trust as the contingent beneficiary can give a much more attractive option. The trust will receive the required minimum distributions and you can dictate, by your written instructions, who will receive the money and when. Just be careful that your trust is structured to meet some very specific IRS requirements necessary for it to qualify to “stretch out” your IRA. (See your Wills & Wellness attorney for details.)

4.   For a larger IRA (each beneficiary will inherit more than $150,000.00) or to insure that you have the most control over this valuable asset, you should consider creating an irrevocable Retirement Benefit Trust, also called a Stand-alone Retirement Trust or Inherited IRA Trust, and name this trust as the beneficiary on your beneficiary designation form.