3 Reasons Why You Want Should not Have Your Trust as Beneficiary of Your Ira?
by admin ~ January 28th, 2009 . Filed under: Taxes .
Joseph J. Dadich, CPA, Esq., LLM asked:
In the complex world of taxes, you have a number of choices when it comes to selecting a beneficiary (or beneficiaries) for your IRA. Some are appropriate. Unfortunately, some are major mistakes and can lead to delays and expenses in getting the funds to your desired recipients.
Some may even exclude some of your desired beneficiaries. In addition, some elections are for estate planning purposes. Let’s take a look at your options.
If you have No Beneficiary
Not recommended. This mandates your IRA be distributed according to your will, if you have one. If you don’t, each state has “intestate” rules that divide your estate up in ways you wouldn’t ever want. I had a client out of New Jersey who’s dad had this issue when he died and unfortunately caused a $1.45mm tax over 5 years and no compounding effect. An IRA with no beneficiary must be distributed within five years. By contrast, a named beneficiary can spread the distribution out over the balance of their life expectancy.
If you only name Your Estate
This has the same effect as the beneficiary is the same as not naming one. The rules require a “named” beneficiary. Now your IRA goes through the probate process. This costs money, takes time and subjects your IRA to your creditors.
The IRS has complex guidelines on how a Trust can qualify as a beneficiary of your Trust. Do you really want to leave this to chance? What’s more, is why would you pay money to be represented by an attorney and have a judge in some probate court decide whom your beneficiary will be? Why should your beneficiaries have to wait around for your estate to be closed? What if your will is challenged? What if you have a big estate with estate taxes due and the IRS is questioning the valuation of your business?
I have seen estates open for as long as ten years as the debate goes back and forth between your attorney and the IRS. The worst case I can think of is your IRA completely eaten up by legal fees inasmuch it may be the only liquid asset.
Name your spouse as primary
This is the most common designation and makes the most sense for a number of reasons.
If the spouse is the sole beneficiary, he or she can elect to treat the IRA as his or her own. This opens up the possibility of delaying the start of the required minimum distributions (RMDs). This could be the spouse’s age 70 1/2, or for a Roth IRA, all the way to the death of the spouse. It also allows further “stretching” of the IRA as the spouse can spread the RMDs over their lifetime plus the lifetime of a beneficiary.
If the spouse is more than 10 years younger than a non-Roth IRA owner, their life expectancy can be used. Beneficiaries other than the spouse, who are more than ten years younger than the IRA owner, are treated as being no more than ten years younger for RMD purposes. This is another “stretching” advantage for naming the spouse as beneficiary.
Naming Children
If there is more than one child named, the youngest age is used for RMD purposes. However, if the children are beneficiaries of a trust, the oldest age is used.
If children are beneficiaries, they can take the RMDs over their life expectancy. Since the RMDs are very low at the younger ages, the account can grow substantially over the years. For example, a $100,000 IRA could distribute literally millions of dollars over the lifetime of a young beneficiary.
Grandchildren
Naming a grandchild gets into the generation skipping transfer tax area. But each person has a lifetime generation-skipping transfer tax lifetime exemption of $2,500,000 (in 2009). In any case, I would consult a tax attorney to make sure this beneficiary election coordinates with the balance of your estate plan.
Because grandchildren are even younger than children are, the lifetime income potential from RMDs would floor you. I can show you an example of the same $100,000 IRA used above as an example that would pay out 20 million dollars to a grandchild over their lifetime under the right circumstances.
The information was provided by Joseph J. Dadich, Esq. Expert Author/Attorney/CPA Creator of ‘Emergency Estate Planning Documents’™ Get your FREE CD and $2,188 in Bonuses at www.1estateplanningmichigan.com or www.15criticalpoints.com
Carey Swygert
In the complex world of taxes, you have a number of choices when it comes to selecting a beneficiary (or beneficiaries) for your IRA. Some are appropriate. Unfortunately, some are major mistakes and can lead to delays and expenses in getting the funds to your desired recipients.
Some may even exclude some of your desired beneficiaries. In addition, some elections are for estate planning purposes. Let’s take a look at your options.
If you have No Beneficiary
Not recommended. This mandates your IRA be distributed according to your will, if you have one. If you don’t, each state has “intestate” rules that divide your estate up in ways you wouldn’t ever want. I had a client out of New Jersey who’s dad had this issue when he died and unfortunately caused a $1.45mm tax over 5 years and no compounding effect. An IRA with no beneficiary must be distributed within five years. By contrast, a named beneficiary can spread the distribution out over the balance of their life expectancy.
If you only name Your Estate
This has the same effect as the beneficiary is the same as not naming one. The rules require a “named” beneficiary. Now your IRA goes through the probate process. This costs money, takes time and subjects your IRA to your creditors.
The IRS has complex guidelines on how a Trust can qualify as a beneficiary of your Trust. Do you really want to leave this to chance? What’s more, is why would you pay money to be represented by an attorney and have a judge in some probate court decide whom your beneficiary will be? Why should your beneficiaries have to wait around for your estate to be closed? What if your will is challenged? What if you have a big estate with estate taxes due and the IRS is questioning the valuation of your business?
I have seen estates open for as long as ten years as the debate goes back and forth between your attorney and the IRS. The worst case I can think of is your IRA completely eaten up by legal fees inasmuch it may be the only liquid asset.
Name your spouse as primary
This is the most common designation and makes the most sense for a number of reasons.
If the spouse is the sole beneficiary, he or she can elect to treat the IRA as his or her own. This opens up the possibility of delaying the start of the required minimum distributions (RMDs). This could be the spouse’s age 70 1/2, or for a Roth IRA, all the way to the death of the spouse. It also allows further “stretching” of the IRA as the spouse can spread the RMDs over their lifetime plus the lifetime of a beneficiary.
If the spouse is more than 10 years younger than a non-Roth IRA owner, their life expectancy can be used. Beneficiaries other than the spouse, who are more than ten years younger than the IRA owner, are treated as being no more than ten years younger for RMD purposes. This is another “stretching” advantage for naming the spouse as beneficiary.
Naming Children
If there is more than one child named, the youngest age is used for RMD purposes. However, if the children are beneficiaries of a trust, the oldest age is used.
If children are beneficiaries, they can take the RMDs over their life expectancy. Since the RMDs are very low at the younger ages, the account can grow substantially over the years. For example, a $100,000 IRA could distribute literally millions of dollars over the lifetime of a young beneficiary.
Grandchildren
Naming a grandchild gets into the generation skipping transfer tax area. But each person has a lifetime generation-skipping transfer tax lifetime exemption of $2,500,000 (in 2009). In any case, I would consult a tax attorney to make sure this beneficiary election coordinates with the balance of your estate plan.
Because grandchildren are even younger than children are, the lifetime income potential from RMDs would floor you. I can show you an example of the same $100,000 IRA used above as an example that would pay out 20 million dollars to a grandchild over their lifetime under the right circumstances.
The information was provided by Joseph J. Dadich, Esq. Expert Author/Attorney/CPA Creator of ‘Emergency Estate Planning Documents’™ Get your FREE CD and $2,188 in Bonuses at www.1estateplanningmichigan.com or www.15criticalpoints.com
Carey Swygert
