So what happens to your IRA if you pass away? If you don’t name a beneficiary like your child or spouse, you could be missing out on years of income for your loved ones. It’s also a good idea to name a secondary beneficiary in case of unforeseen circumstances. Here are some standard designations:
MY ESTATE AS THE BENEFICIARY
This is normally the worst choice. If you have a will, that document will direct distribution. If you do not have a will the account will pass by state law under the statute of descent and distribution. You have now taken a non probate asset and placed it within the jurisdiction of the probate court.
This allows the most flexibility. Your spouse can continue to defer the payment of income tax. This also allows the spouse the ability to determine the beneficiaries at his or her death. For high net worth couples, advanced planning with IRAs is essential.
Children as primary beneficiaries offer a great way to give a child an automatic retirement fund. If each child is designated as a separate beneficiary, he can continue to defer part of the account over his own life expectancy. In a second marriage situation an IRA is a great tool. The designation to children of the first marriage allows a guaranteed inheritance without involving the second family. If done properly it cannot be challenged.
Designation to grandchildren can provide the longest deferral of the payment of income tax. If a two-year-old is a named beneficiary he can receive income over a life expectancy of over eighty years.
A trust will allow you to control the funds after your death. It permits a trustee to allocate among a class of beneficiaries or direct the use of the funds. It also allows the retention of funds if a child is not mature enough to receive the funds. A trust can delay the immediate unrestricted access to the monies by your children.
The use of IRAs to distribute to a charity is a great tax saving vehicle. If you want to give to charity, the monies will go directly free of probate and free of the payment of income tax upon presentation of a death certificate. If the distribution had come directly from the trust, income tax would have first been paid and only a portion of the funds would have gone to the charities.
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