Silicon Valley Estate Planning Lawyers on Reasons to Avoid Naming Your Estate as an IRA Beneficiary

Designating your estate as the beneficiary of your IRA might make sense to you. It’s simpler than choosing one or several loved ones as beneficiaries. It can also prevent future arguments and lawsuits among your family since you’re not naming one person over another.

However, naming an estate as an IRA beneficiary is problematic and comes with a range of disadvantages. Typically, people designate their estate as the beneficiary because they don’t know any better or feel rushed to complete their paperwork.

IRA Distributions

 Before January 1, 2020, the “stretch-out approach” allowed IRA distributions over an individual’s lifetime based on a life expectancy table. However, the SECURE Act no longer permits beneficiaries to use the stretch-out approach. Instead, distributions depend on complicated regulations.

Most beneficiaries are subject to the ten-year rule under the SECURE Act. That means they must accept distribution of the IRA funds within ten years of the account holder’s death.

Only specific individuals can ignore the ten-year rule and stretch out IRA distributions. Those people are:

• Surviving spouses
• Chronically ill people
• Disabled individuals
• People no more than ten years younger than the account holder
• Minor children of the account holder

Consequences of Choosing Your Estate as an IRA Beneficiary

 You might not understand the problem with naming your estate as the beneficiary for your IRA. However, estates can’t follow the ten-year rule. They must distribute all funds within five years.

Emptying an IRA in only five years can have significant consequences, such as:

• Higher taxation – Taking more money out of an IRA during a short timeframe will likely lead to higher taxes.
• More administration costs – Designating an estate as the beneficiary of an IRA means higher legal fees, probate fees, and other expenses.
• Medicare charges – Higher Medicare charges often result from higher IRA distributions.
• Will contests – An angry or upset heir might be more willing to challenge the validity of the will if the IRA beneficiary is the estate.

How to Handle an IRA Beneficiary Designation

 Instead of naming your estate as the beneficiary, consider other options. You could choose one or multiple individuals to transfer the account to when you die.

You must complete a beneficiary designation form. Otherwise, someone you don’t want to receive the funds can end up with the account.

Besides filling out the necessary form, regularly updating it is crucial. You should make changes after significant life events. For example, picking someone else is necessary if your chosen beneficiary dies.

Alternately, you can name a living trust as the beneficiary of your IRA—if the trust is “qualified” to receive IRA distributions.  This is often a simpler and more flexible option, which does not require regular updating of the beneficiary forms but can still maintain optimal tax and legal treatment.

Contact Our Silicon Valley Estate Planning Lawyers

 You can avoid making a costly mistake by carefully choosing someone to be the beneficiary of your IRA instead of your estate. Ensure your beneficiary designations stay up to date, so your asset goes to the right person.

Contact our Silicon Valley estate planning lawyers today if you want to learn more about designating a beneficiary for your IRA. We can help protect your assets and secure your family’s financial future. To schedule a consultation, call 408-889-1290.