05/22/2023
Who should be the beneficiaries of my IRA?
For many of our clients, their IRA is one of their largest assets, if not the largest asset. After death, IRAs pass to the beneficiaries designated on a form with the custodian financial institution â not under the ownerâs Will or Trust. So, this designation form must be taken seriously and should reflect the ownerâs estate planning goals.
Designation forms should be reviewed and updated as part of the estate plan. Frequently we see new clients who have not updated their forms in years, or who believed (incorrectly) that their Will or Trust took care of the IRA. Sometimes they even have deceased persons or ex-spouses still designated as IRA beneficiaries!
Our firm makes written recommendations on who should be the beneficiaries of the IRA, as part of the estate plan. We also ask clients to go to their financial institutions to complete the appropriate designation forms. Getting this done is vitally important to the success of the estate plan.
So, what are the general rules for designating beneficiaries of oneâs IRA? As with estate planning generally, the right choice of beneficiaries depends on personal goals â but there are a few good rules of thumb:
1. If you want to leave any money to charities at death, consider doing that through your IRA. IRA distributions are subject to income tax when received by individuals. However, charities donât pay income tax. So, leaving IRA funds to charities can save perhaps 40% or more in federal and state income tax, depending on brackets. Also, for estates owing estate tax, charitable gifts are deductible against the 40% estate tax as well. Note that charitable gifts are ideal with regular IRAs, not for Roth accounts.
2. After considering charitable gifts, are you married? If so, it usually makes best tax sense to leave the IRA to your spouse. A surviving spouse may make a âspousal rolloverâ of the account, does not have to take distributions until reaching his or her 70s (the exact age is now in transition under recent law changes), and the required annual distributions are modest. However, there is an old saying: âDonât let the tax tail wag the dog.â If you are not comfortable leaving your IRA outright to your spouse, then consider a Marital Trust â there are a number of options that could work.
3. If you are married, make sure to name contingent beneficiaries. These are the people who would be the beneficiaries if your spouse predeceases you. Typically these would be children, or â678 trustsâ for children (see #5 below). The tax laws generally give them 10 years after your death to fully withdraw, and pay tax on, IRAs.
4. If you are single and you have children, then you probably will want to name as beneficiaries either your children, or â678 trustsâ for children (see #5 below). Again, generally they would have 10 years after your death to fully withdraw, and pay tax on, IRAs.
5. We love the use of â678 trustsâ for children as IRA beneficiaries. These are trusts in which the child who is the beneficiary has the unilateral right to withdraw all of the taxable income of the trust annually. These trusts offer enhanced asset protection for children, compared to outright distributions â which could be important if there are financial, litigation, or divorce concerns. And since these trusts qualify as âgrantor trustsâ, they donât require separate tax returns or ID numbers. Everything is reported on the childâs income tax return, as if the trust did not exist. An upcoming newsletter will discuss 678 trusts in more detail.
If you have not reviewed your beneficiary designations or estate plan in some time, please call our office at 843-524-5400 to schedule an appointment.
Finally, our firm has grown over the years mostly due to referrals from our existing clients. Thank you for recommending us to your friends, family, and neighbors.
