If you leave your IRA to minors, perhaps your grandchildren, they may enjoy substantial wealth by stretching out distributions, thus deferring tax over their long life expectancies. There are several ways to accomplish this goal:
* Name the minor personally as outright beneficiary. Here, the money will be available for the minor’s benefit only if a legal guardian is appointed, which involves probate court proceedings, expenses, and delays.
* Name a custodian for the minor’s benefit under the Uniform Transfers to Minors Act. This probably is better than an outright designation but it gives the beneficiary outright control at a young age (as early as 18, depending on the state).
* Leave the IRA in trust for the minor. A later age (30, 35, 40) can be specified for outright distribution. A trustee will have control of the funds in the meantime, with directions to use the funds for the minor’s benefit. The trust should be drafted by an attorney familiar with the IRS trust rules so the minor’s long life expectancy will be the applicable distribution period for the IRA.
* Use an individual retirement trust (IRT) rather than an individual retirement account (IRA). An IRT can have restrictions on the beneficiary’s withdrawal rights, which most IRAs do not allow. The cost of an IRT should be less than the cost of a standalone trust named as beneficiary of the IRA.
IRA owners who have remarried often want to provide for a surviving spouse yet ensure that anything left in the IRA eventually goes to their children from the first marriage. One strategy is to name your spouse as IRA beneficiary, on the condition that she names the children as the beneficiary of her IRA.
However, after your spouse inherits your IRA and rolls it to her own name, she can name anyone she wants as her IRA beneficiary. Even if you have your spouse sign some kind of agreement, stating that she will name your kids as her beneficiaries, it will be hard to make any such agreement binding. Your surviving spouse could simply withdraw money from her IRA, at her convenience.
In this situation, a better solution would be to divide your IRA in two: one for your spouse and one for your kids. Alternatively, you can leave your IRA to a trust for your wife, with your kids as remainder beneficiaries. The latter strategy gives up some potential tax deferral but the presence of a trustee can help to assure fair treatment for all your heirs.