IRA beneficiary designations are often overlooked in the estate planning process. This post will describe some of the basic considerations in completing IRA beneficiary designation forms for traditional IRAs.

IRA owners should first consider whether the can and they want to take advantage of the IRA stretch provisions. These provisions allow the IRA to be paid out over a longer period of time. If married individuals name their spouse as the beneficiary the surviving spouse can simply treat the IRA as if he or she owned the IRA in the event that the IRA owner passes away before they are required to start taking required minimum distributions.

In that case the surviving spouse can turn around and name a beneficiary who will receive the IRA upon the demise of the second spouse. This can allow the eventual recipient of the IRA to take the IRA distributions over a longer period of time — as described below. As a side note, high net worth individuals who own IRAs who opt for this disposition should check their will to see whether the estate tax on the IRA will be borne from the IRA or the other estate assets.

If the IRA owner has children and is not married or is in a second marriage with children from the prior marriage, then it might be preferable for the IRA owner to name his or her children as beneficiaries. In that case, the beneficiary can opt to receive distributions from the IRA based on their own life expectancy if the IRA holder passes away before they are required to start taking required minimum distributions.

If the IRA owner does not have children and is not married, then the IRA owner may want to consider naming a charity as the beneficiary. Transferring IRAs to charity can be beneficial because the charity will not have to pay tax on the sale of the IRA assets and the transfer will entitle the estate to a full charitable deduction. The charity option is often used when such a transfer will reduce the IRA owners estate to an amount (taking into consideration the charitable deduction) less than the applicable exclusion amount (AKA unified credit), thereby eliminating any estate taxes.

IRA owners may also name a conduit trust or other trust (one that could pay outright to an individual beneficiary) as the beneficiary. There are some tricky rules and planning opportunities that come into play in these cases, all of which are beyond the scope of this brief note.

A last option is for the IRA owner to name their estate as the beneficiary. This option should generally be avoided, as it does not permit beneficiaries to stretch the IRA payments and it does not present any favorable tax opportunities.

Another consideration is naming a contingent beneficiary. Given the uncertainties in the estate tax laws, the IRA owner may want to provide a contingent beneficiary to take in the event that the primary beneficiary predeceases the IRA owner or disclaims his or her interest in the IRA.

There are several other IRA beneficiary planning opportunities. As such, it is imperative that IRA owners discuss their particular circumstances with their financial advisors.

By: Kreig Mitchell
Law Office of Kreig Mitchell
1942 Broadway, Suite 314
Boulder, CO 80302
Ph. 303.521.0053
http://www.irstaxtrouble.com