An IRA is meant to be an Individual Retirement Account, spent down during your lifetime and your spouse’s lifetime. However, many people are building up so much wealth in their IRAs (often, the result of a rollover from an employer-sponsored retirement plan) that the full amount won’t be spent by the IRA owner and spouse.
Thus, your IRA may be a large estate asset so it should merit special attention in your estate plan. You need to name a beneficiary for your IRAs, just as you’ll name beneficiaries for life insurance policies, annuities, trusts, etc. Here’s how to do it.
* Think before naming beneficiaries. Check the tax angles with a professional.
* Name “contingent” (backup) beneficiaries, too. This prevents the assets being included in your taxable estate if your primary beneficiary dies before you.
* If you name more than one beneficiary, spell out the percentage of the assets each one will receive. There’s no rule that each beneficiary must get an equal share.
* Determine whether your beneficiaries can manage the asset. If not, you may need to create a trust to hold the asset after your death.
* Review your beneficiary designations periodically. You may need to change them in case of births, deaths, divorce, remarriage, incapacity, etc.
If you have multiple beneficiaries for your IRA, you’re probably better off establishing separate accounts.
Suppose you have a $600,000 IRA and you have named your three children as beneficiaries. Instead, divide your IRA into three $200,000 IRAs, each with a single child as beneficiary.
With this strategy, each individual beneficiary will maintain and manage his or her inherited account, after your death. (The accounts must be kept in your name, as deceased owner.)
Thus, each child will have more control over the pace of IRA distributions. The minimum payout will be unique for each account, to the benefit of younger children.
You may want to name a trust as IRA beneficiary, especially if you think the person who’ll inherit the IRA will need help managing money. However, problems can occur if the trust is improperly drawn up. Enlist the help of an expert.