How Can an IRA Be Inherited?
The simplest way to prepare an IRA to be inherited is to name a beneficiary on the account. The designated beneficiary can be an individual, a trust, or a charity.
You can name primary and contingent beneficiaries, and you can change your beneficiaries at any time.
When the account owner dies, the named beneficiary has some important decisions to make.
What Is a Beneficiary?
A beneficiary is a person or entity you designate to receive the assets in your IRA after you die.
You can name one or more primary beneficiaries and one or more contingent beneficiaries.
A primary beneficiary is the first to inherit the account.
If the primary beneficiary dies before the account owner, the contingent beneficiary inherits the account.
You can name anyone as a beneficiary of your IRA, including your spouse, children, grandchildren, parents, other family members, friends, or even a charity.
You can also name a trust as a beneficiary.
If you name more than one primary beneficiary, each will inherit an equal share of the account unless you specify otherwise.
If you name more than one contingent beneficiary, each will inherit an equal share of the account if the primary beneficiaries die before the account owner.
You can name different percentages for different beneficiaries or give some beneficiaries a larger share than others.
You can also specify that the beneficiaries must inherit the account at certain ages or over a period of years.
How to Name a Beneficiary
The best way to name a beneficiary is to do it when you open your IRA.
You can name a beneficiary on the IRA application form.
If you already have an IRA, you can usually name a beneficiary by completing a beneficiary designation form, which is available from the IRA custodian.
If you have an IRA through your employer, you may be able to name a beneficiary on the enrollment form.
You can also name a beneficiary by listing the beneficiaries in your will.
However, this is not the best way to do it because the beneficiary designation form takes precedence over your will.
Suppose you name a beneficiary in your will, and you also have a beneficiary designation form on file with the IRA custodian. In that case, the person you named on the form will inherit the account, regardless of what your will says.
You can change your beneficiaries at any time by completing a new beneficiary designation form.
You may need to complete a new enrollment form if you have an IRA through your employer.
You should review your beneficiary designation forms at least once a year and update them if necessary.
What Happens When the Account Owner Dies?
When the account owner dies, the named beneficiary has some important decisions to make.
The beneficiary can:
- The beneficiary has several options for taking distributions from the account.
- The beneficiary can take the money all at once or over a period of years.
- The beneficiary can also leave the money in the account and take withdrawals as needed.
- The beneficiary can roll the account into an IRA in his or her own name.
Which option is best depends on the needs of the beneficiary.
For example, if the beneficiary is young and needs the money to pay for education, it may be best to take it all at once.
If the beneficiary is older and needs the money to support himself or herself in retirement, it may be best to leave it in the account and take withdrawals as needed.
If the beneficiary is in a high tax bracket, it may be best to roll the account into an IRA in his or her own name so that the money can continue to grow tax-deferred.
Reasons to Name a Trust as Beneficiary
There are several reasons why you might want to name a trust as the beneficiary of your IRA.
If you have young children, you may want to name a trust as a beneficiary so that the money can be used for their education and other expenses but not given to them outright until they reach a certain age.
If you are divorced, you may want to name a trust as a beneficiary so that your ex-spouse cannot access the money.
If you have creditors, you may want to name a trust as a beneficiary to protect the money from them.
If you are concerned about estate taxes, you may want to name a trust as a beneficiary so that the money can be used to pay the taxes but not given to your heirs outright.
Eligibility Requirements
There are two main requirements that must be met for a trust to be eligible to inherit an IRA.
First, the trust must be a valid legal entity.
Second, the trust must meet the requirements of the Internal Revenue Code.
A trust must have a trustee and at least one beneficiary to be a valid legal entity.
The trustee is the person who manages the trust, and the beneficiary is the person who receives the benefits of the trust.
A trust can have more than one trustee and more than one beneficiary.
To meet the requirements of the Internal Revenue Code, a trust must be a living trust, also known as an inter vivos trust.
A living trust is a trust created during the grantor's lifetime and can be revocable or irrevocable.
An irrevocable trust is a trust that cannot be changed or revoked after it has been created.
A revocable trust is a trust that can be changed or revoked at any time, by the grantor.
Types of IRA Beneficiaries
There are three types of IRA beneficiaries: primary beneficiaries, contingent beneficiaries, and estate.
The primary beneficiary is the person who inherits the account if the account owner dies.
The contingent beneficiary is the person who inherits the account if the primary beneficiary dies.
The estate is the legal entity that inherits the account if the account owner dies without naming a beneficiary.
The primary beneficiary has the first right to inherit the account, and the contingent beneficiary has the second right to inherit the account.
If neither the primary nor contingent beneficiary is alive when the account owner dies, then the estate inherits the account.
Designating a Trustee
To designate a trust as the beneficiary of your IRA, you will need to name the trust as the beneficiary on the beneficiary designation form.
You will also need to provide some basic information about the trust, such as the trustee's name and the date the trust was created.
If you have questions about whether your trust is eligible to inherit an IRA, you should contact a qualified tax advisor.
Advantages and Disadvantages of Designating a Trust as Beneficiary of an IRA
There are advantages and disadvantages to designating a trust as the beneficiary of your IRA.
The main advantage is that it allows you to control how and when the money is distributed after your death.
For example, you can specify that the money can only be used for certain purposes, such as education or medical expenses.
You can also specify that the money can only be distributed to the beneficiaries after they reach a certain age.
The main disadvantage of designating a trust as the beneficiary of your IRA is that it can be complex and expensive to set up and maintain.
If you are considering this option, you should consult a qualified tax advisor to determine if it is right for you.
The Bottom Line
There are many factors to consider when choosing a beneficiary for your IRA.
If you want to control how and when the money is distributed, you may want to consider naming a trust as the beneficiary.
However, it is important to remember that trusts can be complex and expensive to set up and maintain.
You should consult a qualified tax advisor to determine if this option is right for you.
FAQs
1. What is a trust?
A trust is a legal entity that can own property and assets. A trust is created by a grantor, who transfers ownership of property or assets to the trust. The trustee is the person who manages the trust, and the beneficiary is the person who receives the benefits of the trust.
2. What are the three types of IRA beneficiaries?
The primary beneficiary is the person who inherits the account if the account owner dies. The contingent beneficiary is the person who inherits the account if the primary beneficiary dies. The estate is the legal entity that inherits the account if the account owner dies without naming a beneficiary.
3. How do I designate a trust as the beneficiary of my IRA?
You will need to name the trust as the beneficiary on the beneficiary designation form. You will also need to provide some basic information about the trust, such as the trustee's name and the date the trust was created.
4. What are the advantages and disadvantages of designating a trust as the beneficiary of my IRA?
The main advantage is that it allows you to control how and when the money is distributed after your death. The main disadvantage of designating a trust as the beneficiary of your IRA is that it can be complex and expensive to set up and maintain.
5. I don't have a trust, can I still name a beneficiary for my IRA?
Yes. You can name any individual or legal entity as the beneficiary of your IRA. However, if you die without naming a beneficiary, your estate will inherit your IRA.
