Additional IRA Advantages

Individual Retirement Accounts (IRAs) are an investment tool and need to be taken into account when doing estate planning.

It is important to name a beneficiary of an IRA. A spouse is often a beneficiary. A contingent beneficiary should also be named so that the IRA does not pass to your estate and require the opening of a probate administration with the Court in the event that your spouse dies before you.

When a spouse inherits an IRA, he can roll it over into his own IRA. When a non-spouse inherits an IRA, the heir will need to start taking distributions within a year after the IRA owner dies.

If you do not need the funds in your IRA for retirement and want to use them to provide for your beneficiaries instead, you may be interested in “stretching out” your IRA. To do this, when you reach 70 1/2 years of age, take only the required minimum distribution, leaving more assets in your IRA. When you die, your beneficiary can also stretch out distributions over his lifetime and then designate a second-generation beneficiary. It makes sense to name a young beneficiary because the younger the beneficiary, the smaller each distribution will be, which gives the funds in the IRA extra tax deferred years to grow.

In some cases, it makes sense to name a trust as a beneficiary such as if you have minor children, children with special needs or a beneficiary with poor spending habits. The trust must be properly drafted to avoid negative tax consequences. It is possible to set up the trust in a way which allows distributions from the IRA to the trust after the participant’s death to be stretched out over the life expectancy of the oldest trust beneficiary.

Consult your estate planning attorney for further information.