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Exceeding Expectations. Always. — Business Advisors and CPAs

IRA Beneficiary

Estate Planning Through Inherited IRAs

Planning ahead for estate tax can save a significant amount of tax. Strategies for transferring assets, reducing asset values or making charitable gifts can all be employed with great effect if they are started soon enough.

For individuals who do not need their retirement funded by an IRA, it can be used as an estate planning tool to benefit beneficiaries on a tax-advantaged basis. This is accomplished by structuring the IRA to stretch out the benefits to younger generations that are significantly younger than the account owner.


Spouse as beneficiary

Choosing your spouse as a beneficiary is a good idea for estate planning if there is a substantial age difference between you and your spouse. When your spouse is named beneficiary, he or she can elect to treat the IRA as his/her own or can choose to be treated as a beneficiary.

Rollover

A spouse treated as owner, is called rollover. A surviving spouse will essentially roll the IRA funds over into his or her own IRA or can designate themselves as the owner of the inherited account. This will allow the funds to continue to grow tax-deferred until your spouse chooses to begin withdrawing the funds or is required to make the minimum required distributions (RMDs) when they turn age 70 ½.

Spouse treated as non-spouse beneficiary

If the spouse does not do the above, the spouse will be treated as a beneficiary. The sole spouse beneficiary will take the RMD over their life expectancy, but must begin the distribution no later than December 31 of the year the deceased spouse would have reached age 70 ½. Therefore, unlike when the spouse is treated as owner, the distributions would begin when the deceased spouse would have reached 70 ½ not when the surviving spouse reaches 70 ½. This provision makes this option a less attractive estate planning tool.


Non-spouse beneficiaries

If the beneficiary of your IRA is someone other than your spouse, such as a child or grandchild, one of the following options would generally apply:

  • Take a lump-sum distribution of the IRA’s balance
  • Withdraw the funds by the end of the year of the fifth anniversary of your death, if death occurs before beginning to take RMDs
  • Withdraw the funds over your “remaining” life expectancy, calculated under the applicable IRS table as of the year of death. Distributions to beneficiaries must begin by the end of the year following the year of death
  • Hold the funds in an “inherited IRA,” which allows the beneficiary to spread RMDs over his or her own life expectancy. An “inherited IRA” is one that is in the decedent’s name but payable to the named beneficiary. Distributions to beneficiaries must begin by the end of the year following the year of death


Non-spouse beneficiaries cannot treat the inherited IRA as their own, which means they cannot roll over any distributions to their own IRA. To maximize the benefits of the tax-deferral, the “inherited IRA” is usually the best option.


Trust as beneficiary

When naming your beneficiaries, there are considerations other than the tax-deferral. When naming a child or grandchild as beneficiary of your IRA, there is nothing to prevent him or her from taking a lump-sum distribution of the IRA and thus erasing any potential deferral benefits. To ensure this does not’t happen, you can name a trust as beneficiary. The trust will need to meet certain requirements, such as distributing the RMDs received from the IRA to trust beneficiaries. The trust’s RMD will be based on the life expectancy of the oldest trust beneficiary.

If you have any questions regarding Estate Planning through IRAs and would like to speak with one of our trusted advisors, please contact us.


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