When Not to Name Your Spouse the Beneficiary of Your IRA

In most cases, naming your spouse as the beneficiary of your IRA makes the most sense. However, depending on your wishes, other beneficiary arrangements may do a better job of accomplishing your goals.

First, let's take a quick look at the requirements and advantages of naming your spouse as the sole beneficiary of your IRA. Choosing another beneficiary will cause you to lose some of these advantages.

The first advantage allows the spouse to elect to treat the IRA as his or her own. When the objective is to delay the required minimum distributions (RMDs) for as long as possible, the spouse would generally elect this option. This election allows the spouse to postpone RMDs until they reach age 70 1/2 in the case of a traditional IRA or SEP. RMDs are deferred all the way to the death of the spouse if the IRA were a Roth. If the spouse is younger than the deceased IRA owner, this makes a lot of sense where deferral is desired.

Using the life expectancy of the spouse and a beneficiary is one of the spouse's options, thus potentially extending the payout period. If the spouse were not the sole beneficiary, the life expectancy of the IRA owner and beneficiary is the requirement. Given the fact that the IRA owner is older, this shortens the distribution period.

If the IRA owner dies before age 70 1/2, the spouse can defer the RMDs until the IRA owner would have reached age 70 1/2. If the IRA owner is younger than the spouse is, this could be an attractive option.

Despite these advantages and flexibilities, other beneficiary elections may make more sense.

Marital Deduction Trust

The use of a trust has many advantages such as the ability to "customize" the distribution of trust assets among beneficiaries, tax advantages and the ability to sprinkle income.

One main advantage of naming a marital trust as the beneficiary of your IRA is to include a QTIP provision (Qualified Terminal Interest Property). This allows the IRA owner to control where the property passes upon the death of the spouse. The most obvious use of a QTIP election is to make sure the children or a person are not disinherited due to the spouse's own subsequent beneficiary election or a second marriage.

Credit Shelter Bypass Trust

These trusts take advantage of the unified credit the law provides each person. In simple terms, a credit shelter bypass trust has two parts, Part A and Part B. It receives all the estate assets. The spouse typically receives income from both parts. However, at the death of the spouse, their part flows directly to (generally) the children, thus removing it from double taxation. Today, proper planning and the use of a credit bypass trust can move $4,000,000 to the children free of tax.

RMDs from the IRA are still required and based on the life expectancy of the oldest beneficiary of the trust (probably the spouse). The tax advantages of the Credit Shelter trust conflict with the ability to stretch the RMDs out for the long possible time.

Dynasty Planning

Here, the goal is to provide for as many generations of beneficiaries as possible, as opposed to planning solely for the spouse. Again, RMDs are still required. The name of the game is to spread the payouts over the longest period possible by using the youngest beneficiaries. The advantage is the IRA account continues to grow at interest. Under the right circumstances, a $100,000 IRA could pay out over 20 million dollars.

Traditionally, a dynasty trust is used. While "the rule against perpetuities" is not in effect in all states, generally a person can spread the payout over several generations. The maximum would be the life of anyone alive at the death of the creator of the trust, plus 21 years. However, as we have seen, for RMD purposes, the life expectancy of the oldest trust beneficiary is required when a trust is the beneficiary of an IRA.

One way to get around this is to establish a dynasty trust for each beneficiary. Alternatively, to keep it simple, just name each beneficiary separately (i.e. children, grandchildren) and forget about the trust.

While naming the spouse as the only beneficiary of an IRA has its advantages, do not just blindly make this election. The size of your estate, the situation of your beneficiaries and your goals are some of the factors that may require another choice. This is the time to sit down with your financial planner and an estate planning attorney and review all the options and their consequences.

Rate Article

Related Videos
Play Video How To Leave Your IRA To Your Children Tax Free	Play Video What is a Roth IRA?	Play Video IRAs for Kids	Play Video Roth IRA Conversions	Play Video What is an IRA?

Listed below are more articles related to the above article from the "Estate Planning" article category.

People interested in the above article "When Not to Name Your Spouse the Beneficiary of Your IRA" are also interested in the related articles listed below:

 

Asset Protection - Retain Your Wealth

Asset Protection is everyone's desire, but adults share a characteristic - that they may be sued at anytime, for any reason, whether founded or not. Civil actions range from the serious to the frivolous. Did you offend someone today with something you said? Did you cause someone to suffer sudden whiplash syndrome in the parking lot? Are you a professional facing a disgruntled client or patient? Do you own a company employing someone who did something irresponsible on company time? Did you err on the side of caution... or throw caution to the wind?

Estate Administration In Canada

When an individual dies, the assets owned by him must be located and protected. These assets are called as the deceased’s estate. The debts of the deceased must be paid out of the estate assets. After the debts have been paid from the estate, whatever remains can then be distributed among the beneficiaries named in the deceased’s will or according to the provincial law of intestacy. When an individual dies without a will, he is said to have died intestate.

A House Divided

One of the biggest issues seniors face as they get older is how to preserve an inheritance for their children. Their biggest fear is spending all of that money on assisted living and/or nursing home care. As each family situation is different, so is each solution. Perhaps you can learn something from the experience of one of my clients.

Set Up A Living Trust To For the Sake of Your Descendants

Living trusts are usually set up so that any assets may be passed to inheritors or beneficiaries without necessarily going the probate way. Many people have experienced cases where, when owners of assets pass away, the beneficiaries fight over these assets just because there was no established living trust that will directly pass the assets to the real beneficiaries.

Tune Up Your Finances

With the beginning of a new year, it seems everywhere you turn you hear something about self-improvement. There are plans for weight loss, exercise regimens, quitting smoking, going green and more. What about your finances? Even if you think your finances are in 'good shape', everyone could use a little 'tune up' to make sure everything is running smoothly. And it's not as hard to do as you think. There are some very simple steps you can take that can make a world of difference.

Estate Planning - Some Simple Advice

Most Americans do not know how their assets will be divided once they die. Arizona attorney Steve Allen, known as the "estate planning doctor," has started a website to explain the complicated subjects of wills and trust.

Don't Fail to Plan for the Inevitable

The American Bar Association says that 19 percent of Americans do not have a will. Steven Allen, an estate planning expert, says this can cause families more grief and heartache after a loved one dies.