It is important to pass your IRA assets onto your heirs with appropriate IRA beneficiary designation to avoid unnecessary income taxes. When you open a traditional IRA you are required to complete and sign a beneficiary designation form naming the beneficiary or beneficiaries of your IRA. Each company handing IRAs will have its own beneficiary designation form, and some of these forms can be quite confusing. How you fill out your IRA beneficiary designation form is a vital component in your estate plan. It cannot be over-emphasized how extremely important it is to correctly fill out your beneficiary designation forms to avoid unintended income tax consequences.
Following are answers to common questions regarding IRA beneficiary designations for married individuals with children and who have a revocable “living” trust as part of their estate plan.
1) Should I name my revocable trust as the beneficiary of my IRA?
This is usually not a good idea if you leave a surviving spouse at your death. Upon your death the distribution options are limited if you name your revocable trust as the primary beneficiary instead of naming your spouse. Designating your spouse as the beneficiary and keeping the IRA out of the trust enables your spouse to roll the proceeds of the inherited IRA over to the his or her own IRA upon your death. Also, naming your spouse as the primary beneficiary gives them more options for deferring the income tax on the distributions receivable by them.
2) If I designate my spouse as my primary IRA beneficiary, what is the difference between naming my trust for my children as the contingent beneficiary or naming my children directly as contingent beneficiaries?
Naming Trust as Contingent Beneficiary: If your spouse predeceases you and your then irrevocable trust is the contingent beneficiary, each of your children will have to take their distributions over the life expectancy of your oldest child. This means that your youngest child will not get the longest possible period of time over which to take (and pay income tax on) his or her distributions. This may not be the best solution if you have a sizable IRA and there is a great disparity in age between your youngest and oldest child.
Naming Children Directly as Contingent Beneficiaries: If your spouse predeceases you and your children are the named contingent beneficiaries, each child can take a distribution over their own life expectancy.
IMPORTANT NOTE: If you name your children directly as the contingent beneficiaries, care should be taken to determine what happens if one of them dies before you leaving children of their own — your grandchildren. Unless you specify otherwise, the beneficiary designation forms of most IRA providers specify that your deceased child’s share will not go to your grandchildren; instead your deceased child’s intended share will go to your surviving children.
Suggested action regarding your IRA beneficiary designations:
▸ Contact your IRA provider and request a copy of the beneficiary form signed by you. Do not accept verbal information. Tell them you want a copy of the original beneficiary designation form signed by you that is on file with their company. Also tell them you want a blank copy of their form in case you choose to update your IRA beneficiary designations.
▸ When you receive the copy of your signed beneficiary designation form, review it to be certain the named beneficiaries are exactly those persons you want to receive your IRA assets upon your death.
▸ Contact a knowledgeable attorney if you have any questions concerning the tax implications of your beneficiary designations.
▸ If you fill out a new IRA beneficiary form, send the updated form back to the company – but only after making copies of your updated form for your files. Also provide copies of your updated form to your attorney, your accountant, and your financial adviser. You should also request that your IRA provider provide you with a confirmation notice that your updated form is now on file with them.
Paul J. Dunn, Attorney at Law
Arizona Estate & Trust Law, Plc
379 Summit Pointe Drive
Prescott, AZ 86303