When it comes to estate planning, retirement assets, particularly Individual Retirement Accounts (IRAs), often constitute a significant portion of a deceased individual's estate. Unfortunately, these retirement accounts are also prone to estate-planning errors, exacerbated by recent changes in the rules governing distributions for inherited IRAs. Amidst this complexity, if you wish to leave your IRA to your heirs, there are crucial considerations to bear in mind.

If you want to leave an IRA to your heirs, this is not accomplished through a Will or living trust. Instead, an IRA's transfer occurs outside of probate, facilitated by a beneficiary designation on the account. Unlike a 401(k), where spousal approval is necessary for naming someone else as the beneficiary, an IRA allows you to designate anyone you choose. Whether it's a spouse, children, family members, or even a charity, the key is to name your intended beneficiary through a beneficiary form submitted to the custodian of the IRA.

One mistake people often make with their IRAs is forgetting to fill out or update the form that names who gets the money. If you don't do this, some IRA companies might just give the money to your husband or wife by default, and others might give it to your estate. This can lead to the money going to people you didn't plan for or cause extra taxes for your family. It's really important for IRA owners to make sure they have a correct and current form with the company that handles their IRA, especially if their spouse passes away or if they get divorced.

In the past, inherited IRAs allowed beneficiaries to take required minimum distributions (RMDs) based on their remaining expected lifespan, offering a stretched distribution feature that minimized the impact on tax brackets. However, the SECURE Act of 2019 altered this landscape, mandating non-spouse beneficiaries to withdraw funds from an inherited IRA within ten years. While exceptions exist for surviving spouses, minor children, and certain others, the overall impact is a departure from the previous “stretch” feature.

At first, there was a lot of confusion and the IRS imposed some fines, but later on, they cleared things up about how much money older folks inheriting IRAs in 2020 or later have to take out each year. To figure out what to do and avoid getting fined, it's really important to talk to a financial advisor who knows the ins and outs of these changing rules.

Additionally, the option to make a trust the beneficiary of an IRA presents several advantages. This approach affords control over the extent to which beneficiaries can access IRA assets. While beneficiaries must still take required minimum distributions, designating a trust as the beneficiary allows for controlled distributions in accordance with the trust's terms. This strategy proves beneficial in scenarios involving a surviving spouse and children from a previous relationship, ensuring a structured distribution of IRA assets throughout their lifetimes and beyond.

Schedule a free appointment with our Trust Advisor to learn how easy it is to set-up your living trust. (800) 235-0963.