Individual Retirement Accounts (IRAs) often comprise a significant portion of a person’s estate, making it essential to carefully plan for the distribution of these retirement assets. Unfortunately, IRAs are prone to estate planning errors, and their distribution rules have added further complexity.
If you wish to leave your IRA to your loved ones after your passing, it's important to understand the necessary steps. Working with experienced estate planning attorneys like James Bart Leonardi, LLC can ensure your IRA goes to the appropriate beneficiaries.
Unlike other assets, an IRA cannot be designated in a will. Instead, the IRA passes outside of probate through a beneficiary designation form provided by the account custodian. It is crucial to complete and update this form regularly to ensure your IRA goes to the intended beneficiaries. Neglecting to update the form can lead to unintended consequences, such as the IRA going to individuals you did not intend (for example, an ex-spouse) or create adverse tax implications for your heirs.
In the past, inherited IRAs offered a “stretch” feature, allowing beneficiaries to take required minimum distributions (RMDs) based on their remaining life expectancy. However, the 2019 SECURE Act changed that. Now most non-spouse beneficiaries must withdraw all funds from an inherited IRA within ten years, with some exceptions for surviving spouses and minor children.
The IRS provided guidance on the RMD requirement, and penalties for non-compliance were initially imposed but waived until 2023.
Naming a trust as your IRA beneficiary—instead of specific individuals—offers several advantages. By doing so, you can control how much your beneficiaries can access from the IRA, ensuring it aligns with your intentions.
Furthermore, if you have children from a previous relationship, leaving the IRA to a trust allows your surviving spouse to receive RMDs during their lifetime while ensuring your children receive the remaining assets after their passing. If your children are minors, a trust can eliminate the need for a conservator and distribute IRA assets for their benefit according to the trust terms.
Choosing a trust as the beneficiary of your IRA can also offer protection from creditors. When an IRA is inherited outright, it becomes vulnerable to the recipient's creditors. However, by keeping the IRA assets under the control of a trust, they may be safeguarded from creditors’ reach.
Call James Bart Leonardi, LLC today to learn more about IRAs, trusts and naming beneficiaries, and to create or update your estate plan.