An Individual Retirement Account (IRA) is a type of savings account designed to help people save for retirement.  About one-third of American adults have an IRA.  In determining how to deal with an IRA during the estate-planning process, various tax considerations, estate planning goals, and individual circumstances unique to each person must be taken into account.  In order for a trust to benefit from continued tax deferral opportunities afforded by an IRA, it must meet certain requirements. Often, it is preferable to name an individual as the primary beneficiary, as opposed to a trust. This is almost always true in the case of a married couple.

Naming a spouse as the primary beneficiary under an IRA provides the beneficiary with a number of options.  If a spouse inherits a deceased spouse’s IRA, the surviving spouse generally has the following three options:

  1. to treat it as their own IRA by designating themselves as the account owner;
  2. to treat it as their own IRA by rolling it over into their IRA, or to the extent it is taxable, into a:

    (a) qualified employer plan,

    (b) qualified employee annuity plan (403(a) plan),

    (c) tax-sheltered annuity plan (403(b) plan), or

    (d) deferred compensation plan of a state or local government (457 plan); or

  3. to treat themselves as the beneficiary rather than treating the IRA as their own.

A surviving spouse will be considered to have chosen to treat the IRA as their own if:

  1. contributions (including rollover contributions) are made to the inherited IRA;
  2. they do not take the required minimum distribution for a year as a beneficiary of the IRA.

However, a surviving spouse will not be considered to have chosen to treat the IRA as their own if they are not the sole beneficiary of the IRA, or if they do not have an unlimited right to withdraw amounts from it.

If a surviving spouse receives a distribution from their deceased spouse’s IRA, he or she may roll that distribution over into their own IRA within the 60-day time limit, so long as the distribution is not a required distribution, even if he or she is not the sole beneficiary of the deceased spouse’s IRA.

If a person wishes to leave money to a charity, naming the charity as the sole beneficiary under their IRA may be the best way to go.  A 501(c)(3) organization may receive the full amount in an IRA account income-tax free.

When a trust is designated as the beneficiary under an IRA, it is often difficult to determine the type of tax treatment distributions from the IRA will receive. Some common trust provisions may potentially result in negative tax consequences; for example, when the trust calls for the payment of expenses and debts of the estate. To avoid such pitfalls, the trust should prohibit the use of IRA proceeds for the payment of estate debts and expenses.

There are certain situations when naming a trust as the beneficiary under an IRA may be advisable. If the settlor has children from a prior marriage, special needs children, creditor-protection concerns, or needs to fund a credit shelter trust, then it may be appropriate to name the trust as the beneficiary.

In summary, this is a technical process and many factors unique to the individual IRA account owner must be weighed and considered.  Therefore, there can be no uniform beneficiary designation recommendation when it comes to an IRA.  Each IRA account owner would be well advised to consult his or her financial advisor or tax specialist for advice.

The above article is an excerpt from Estate Planning in Arizona: What You Need to Know, 2nd Edition (Wheatmark, 2019), by Donald A. Loose, republished with the author’s permission.

Disclaimer: Laws change constantly. Specific legal advice should be obtained regarding any legal matter. The information contained on this website does not constitute legal advice and no attorney-client relationship is created. 

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Don Loose Author
Lawyer | Loose Law Group | View My Profile

Don likes to target shoot, scuba dive, and pilot airplanes.  Most recently, he has been working on his golf handicap.  Don enjoys writing, reading, and spending time with his wife, twin sons, and golden retriever, Lucy.

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