Naming a beneficiary for your IRA is crucial—especially if you have a spouse or children and don’t want your funds caught up in probate when you pass away. When you open an IRA, you are asked to name a beneficiary, and there are several ways you can do this. Typically, if you’re married, your first thought may be to name your spouse as the primary beneficiary. However, you can also name a trust as the primary beneficiary over your spouse. At first, this may cause you to pause…but, hear us out. It may be more advantageous than you think.
Deciding whether to name a trust as a primary beneficiary for your IRA over your spouse is not an uncommon concern and is very important to look into when planning your estate. With IRAs, naming a spouse as primary beneficiary and a trust as a contingent beneficiary may be more beneficial than you think (no pun intended). With this option your spouse gains several ways to take over those funds, in ways that fit his or her needs best once you’re gone. A spouse can decide to rollover the inherited assets or disclaim their position within a nine-month period. Spouses also have the freedom to treat the IRA as if it were their own, which might mean deciding to convert the IRA to a Roth down the road. If the passing of a spouse occurs before his/her required beginning date (RBD), the surviving spouse can choose to delay life expectancy payments until the year the IRA holder would have turned 70 ½.
Not married? Even with a non-spouse named beneficiary there may be more payout options available than with a non-individual beneficiary (depending on whether the death of the IRA holder occurred before or after the RBD). Leaving your inheritance primarily to a trust is something you may want to do if your intended beneficiaries are minors, or if you are concerned how your intended beneficiaries will spend the money.
A few other beneficiary tips when opening and maintaining an IRA:
- Remember to name both primary and contingent beneficiaries. The primary beneficiary can choose to disclaim assets, passing them along to the contingent(s)
- Not naming an IRA beneficiary or forgetting to list a contingent (in the off chance that the sole primary beneficiary and IRA holder both pass) will end up with the account going to probate. The IRA wouldn’t be able to distributable to heirs until the probate process concludes, which can take more than a year.
- Remember to reevaluate your designation of beneficiary for your IRA after every major life event.
- Keep a copy of your beneficiary designation and/or trust in a secure location and make sure your loved ones know where to find it.
Midland is a self-directed retirement plan administrator that serves clients across the nation, with local offices in Ft. Myers and Miami, Florida, and in Chicago, Illinois. Our clients hold over $2 billion in self-directed assets, making us a leader in our industry. If you’d like to learn more about self-directed retirement plans or have questions about this article, please contact us at (239) 333-1032 or visit www.midlandtrust.com.