| You have a number of choices when it comes to | | | | more than ten years younger than the IRA owner, are |
| selecting a beneficiary (or beneficiaries) for your IRA. | | | | treated as being no more than ten years younger for |
| Some are appropriate. Some are mistakes and can | | | | RMD purposes. This is another "stretching" advantage |
| lead to delays and expenses in getting the funds to | | | | for naming the spouse as beneficiary. |
| your desired recipients. Some may even exclude | | | | Children |
| some of your desired beneficiaries. In addition, some | | | | If children are beneficiaries, they can take the RMDs |
| elections are for estate planning purposes. Let's take a | | | | over their life expectancy. Since the RMDs are very |
| look at your options. | | | | low at the younger ages, the account can grow |
| No Beneficiary | | | | substantially over the years. For example, a $100,000 |
| Not recommended. This mandates your IRA be | | | | IRA could distribute literally millions of dollars over the |
| distributed according to your will, if you have one. If you | | | | lifetime of a young beneficiary. |
| don't, each state has "intestate" rules that divide your | | | | If there is more than one child named, the youngest |
| estate up in ways you wouldn't ever want. | | | | age is used for RMD purposes. However, if the |
| An IRA with no beneficiary must be distributed within | | | | children are beneficiaries of a trust, the oldest age is |
| five years. By contrast, a named beneficiary can | | | | used. |
| spread the distribution out over the balance of their life | | | | Grandchildren |
| expectancy. | | | | Because grandchildren are even younger than children |
| Your Estate | | | | are, the lifetime income potential from RMDs would |
| Naming your estate as the beneficiary is the same as | | | | floor you. I can show you an example of the same |
| not naming one. The rules require a "named" | | | | $100,000 IRA used above as an example that would |
| beneficiary. Now your IRA goes through the probate | | | | pay out 20 million dollars to a grandchild over their |
| process. This costs money, takes time and subjects | | | | lifetime under the right circumstances. |
| your IRA to your creditors. | | | | Naming a grandchild gets into the generation skipping |
| Why should you pay money to be represented by an | | | | transfer tax area. But each person has a lifetime |
| attorney and have a judge in some probate court | | | | generation-skipping transfer tax lifetime exemption of |
| decide whom your beneficiary will be? Why should | | | | $2,000,000 (in 2006). In any case, I would consult a tax |
| your beneficiaries have to wait around for your estate | | | | attorney to make sure this beneficiary election |
| to be closed? What if your will is challenged? What if | | | | coordinates with the balance of your estate plan. |
| you have a big estate with estate taxes due and the | | | | A Trust |
| IRS is questioning the valuation of your business? I | | | | There may be some good reasons to name a trust as |
| have seen estates open for as long as ten years as | | | | the beneficiary of your IRA. Your estate could be large |
| the debate goes back and forth between your | | | | enough so that you do not want your IRA to be |
| attorney and the IRS. The worst case I can think of is | | | | subject to taxation twice. You may want to take |
| your IRA completely eaten up by legal fees inasmuch | | | | advantage of the marital deduction, control where the |
| it may be the only liquid asset. | | | | balance of your IRA goes after the death of your |
| Your Spouse | | | | spouse or have a spouse that is not a U.S. citizen. |
| This is the most common designation and makes the | | | | These objectives need to weighed against the ability |
| most sense for a number of reasons. | | | | of your spouse to treat your IRA as their own with the |
| If the spouse is the sole beneficiary, he or she can | | | | attendant advantages. If a trust is the beneficiary, the |
| elect to treat the IRA as his or her own. This opens up | | | | spouse cannot make this election, even if they are the |
| the possibility of delaying the start of the required | | | | only beneficiary of the trust. |
| minimum distributions (RMDs). This could be the | | | | There are other beneficiary options beyond the scope |
| spouse's age 70 1/2, or for a Roth IRA, all the way to | | | | of this article. I hope it is clear that there is no rubber |
| the death of the spouse. It also allows further | | | | stamp best beneficiary election. Prior to making a |
| "stretching" of the IRA as the spouse can spread the | | | | beneficiary choice, thought needs to be given to your |
| RMDs over their lifetime plus the lifetime of a | | | | estate, your family's circumstances, the rules and your |
| beneficiary. | | | | wishes. |
| If the spouse is more than 10 years younger than a | | | | In many cases, you should consult a tax attorney. The |
| non-Roth IRA owner, their life expectancy can be | | | | examples I have used here are my understanding of |
| used. Beneficiaries other than the spouse, who are | | | | the rules and cannot be relied upon as tax advice. |