IRA beneficiary advice for two different situations

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IRA beneficiary advice for two different situations

Post by focusedonwhatmatters » Mon Dec 17, 2018 2:19 pm

Last edited by focusedonwhatmatters on Thu Apr 18, 2019 4:49 pm, edited 1 time in total.

Alan S.
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Re: IRA beneficiary advice for two different situations

Post by Alan S. » Mon Dec 17, 2018 6:41 pm

focusedonwhatmatters wrote:
Mon Dec 17, 2018 2:19 pm
I have read conflicting articles on if a trust should be named beneficiary of IRAs, so here are the questions about what to do in these situations:

1. Young widow (40s) with two minor children inherited young spouse's IRA, and assumed it. There is also a Roth IRA (not inherited). There is a revokable trust. Should the trust be named beneficiary, or the two minor children directly? What about when the children turn 18?

2. Elderly widow inherited and assumed spouse's IRA, and is taking RMDs. There is also a Roth IRA. There is a revokable trust leaving funds to adult children who are in their 40s-50s. Should the beneficiary of the IRA and Roth be the trust or the adult children directly? Neither adult child is in need of RMDs at this time.

Thanks in advance!

1) Electing ownership of an inherited IRA by a young spouse is a classic error. Now any distributions that she might need before age 59.5 will be subject to the early distribution penalty. This error often leads to having to start an inflexible 72t (SEPP) plan to waive the penalty but many SEPP started under age 50 end up busted since it is very difficult to predict the amount of funds needed for 15+ years.

Naming an RLC as an IRA beneficiary rarely makes sense, but in some cases a children's trust might. Another common solution is naming an UTMA account for each child as the beneficiary. In the latter case, the child will have free access to the inherited IRA at the age of majority in their state.

2) In this situation, the assumption of the account is correct, and there are downsides to NOT electing ownership. In this case with responsible adult children without major creditor risks or divorce risks, the children would normally be named directly. Note that if a trust inherits a TIRA (Roths are generally tax free) and retains distributions in the trust, the tax rate when distributed from the trust is much higher than individual rates. Further, if mistakes are made and a trust beneficiary is not qualified for look through, the stretch is lost and the 5 year rule will apply if the IRA owner passes before their RBD.

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Re: IRA beneficiary advice for two different situations

Post by bsteiner » Mon Dec 17, 2018 10:26 pm

Probably neither. She should consider leaving her IRA to her children in separate trusts for their benefit.

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