Chicago Estate Planning and Individual Retirement Accounts

Individual Retirement Accounts (IRAs) need to be taken into account when doing estate planning.

The most important thing to remember with an IRA for estate planning purposes is to name a beneficiary. While a spouse is usually the logical choice for a beneficiary, you should be sure to name contingent beneficiaries as well. If you and your spouse die at the same time and there was no contingent beneficiary, then the IRA would go to your estate and may require the opening of Probate (the legal process of administering the estate of a deceased person before a judge). When a spouse inherits an IRA, he can roll it over into his own IRA. When a non-spouse inherits an IRA, the beneficiary will need to start taking distributions within a year after the IRA owner dies.

If you don’t need the funds in your IRA for retirement and you 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 ½, take only the required minimum distributions, leaving more assets in your IRA. When you die, your beneficiary can also stretch distributions out 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 must be, which gives the funds in the IRA extra tax-deferred years to grow.

In some cases, it may make sense to name a trust as a beneficiary. This is particularly true if you have minor children, children with special needs or a beneficiary with poor spending habits. But the trust must be properly drafted to avoid negative tax consequences. If the trust is a “see-through” trust or a “conduit” trust, then the distributions from the IRA to the trust after the participant’s death can be stretched over the life expectancy of the oldest trust beneficiary.

Consult your estate planning attorney for further information.