Deciding who should inherit your retirement account is an important part of estate planning. You have several options that are available.
When many people pass away, they will still have a lot of money in their individual retirement accounts for a beneficiary to inherit. It is important to decide who that beneficiary will be, in a way that fits your overall estate plan. Contact an estate planning attorney to figure this out.
The IRA can be used to balance out other bequests and can be used to enhance other estate planning goals. Depending on what you decide to do, there are various tax implications, which Morningstar recently discussed in "Who Should Inherit Your IRA?"
- Spouse – If your spouse is the beneficiary, he or she can roll your IRA into their own. However, it might not make sense to designate a spouse, if they are nearing the age of having to take required minimum distributions and will not need the money.
- Child or Grandchild – If they inherit the IRA, then they can stretch the benefits out over their own lifetimes. However, as a practical matter, few do so because they need the money.
- Charity – Your estate can get a tax deduction, if you leave your IRA to a charity. It can be complicated, so get expert advice before filing out a beneficiary designation form.
- Your estate – There is not much benefit to naming your estate as the beneficiary. However, if you cannot decide on another option, you can do so.
- A trust – Ordinarily, there is no benefit to leaving your IRA to a trust. However, if the beneficiary would otherwise be a minor child or unable to manage their finances, it might be necessary to do so.
Reference: Morningstar (March 2, 2018) "Who Should Inherit Your IRA?"
If your children inherit your retirement accounts, they will have a few options about what to do with them.
Most people designate their spouses as the beneficiaries of their retirement accounts after they pass away. Consequently, the surviving spouse then becomes the owner of the accounts and can use the account in the same way that the deceased spouse did.
However, sometimes people name non-spouse beneficiaries, such as their children or the children end up receiving the accounts after the designated spouse passes away.
What the children can do with the accounts is not as simple as it is for spouses. However, there are a few options.
The Wills, Trusts & Estates Prof Blog discusses some of these options in "What Your Kids Can Do When They Inherit Your Retirement Accounts."
The options include:
- The assets in the account can be taken out immediately as one lump sum.
- The assets in the account can be taken out whenever needed, as long as the account is empty within five years.
- The children can choose to stretch the account out over their own expected lifetimes. However, they will need to make annual required minimum distributions and must take the first one by a set time.
If you have questions about your retirement accounts and your heirs, then talk to an estate planning attorney to get answers. While you are at it, learn more about how your retirement accounts can be used as part of an overall estate plan.
Reference: Wills, Trusts & Estates Prof Blog (Nov. 22, 2017) "What Your Kids Can Do When They Inherit Your Retirement Accounts."