What If Estate Is Beneficiary of an IRA?
Usually when an estate planning attorney comes across an estate named as a beneficiary, all they can do is shake their heads. It’s already too late to make any changes and, in most cases, the results are bad, reports a recent article from Kiplinger that warns “Don’t Name Your Estate as Your IRA Beneficiary.”
This usually occurs because the person was in a hurry or didn’t know better. It is sometimes because they don’t know who should become the beneficiary and are advised to just write down their estate to move the application process along. The problem comes after years go by, the account owner dies and the beneficiary designation is revealed.
The SECURE Act eliminated what was once known as the “Stretch IRA,” where beneficiaries could take withdrawals based on an IRS table of life expectancy. The SECURE Act changed how IRA distributions are made and with a few exceptions, beneficiaries have ten years to empty the account.
However, the people who are not subject to the ten-year rule include: surviving spouses, disabled individuals, chronically ill individuals and individuals within ten years of age of the original owner.
One additional exception: minor children, until they reach the age of majority, at which point they too must empty the IRA in ten years’ time.
Estates may not use the ten-year rule. They must distribute the funds in an even shorter time period: five years. There are a number of reasons to avoid this:
- The shorter the time period for withdrawals, the higher the potential for higher taxes.
- Higher income levels can lead to higher Medicare charges.
- Higher income levels can also lead to more taxes on Social Security income.
- Assets left directly to a named beneficiary have some protection against creditors.
- Assets in your estate have no protection at all against creditors.
- Higher administration costs for probate fees, legal fees, etc.
- Increased potential for a disgruntled heir to challenge your will.
The problem is solvable, if you act while you are living. Start by reviewing your accounts and identifying beneficiary designations. If you can’t find the beneficiary form, contact the institution, get a new one, complete it and submit it.
Keep in mind that if you don’t name a beneficiary of your IRA, or your beneficiary has already died (such as your spouse) and no contingent beneficiary is named, your estate is by default the beneficiary of your IRA. Beneficiary planning is an integral part of estate planning, and many of the mistakes I see people make are improper beneficiary planning.
Reviewing beneficiaries is something to be done every three to five years, every time you review your estate plan. Don’t leave this to the last minute—take care of it now.
BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.
If you liked this article, “What If Estate Is Beneficiary of an IRA?” read also these additional articles: Will Making a Gift Conflict with Medicaid? and Does a Beneficiary have to Pay Taxes on 401(k)? and The Risks of Creating Your Own Estate Plan and Is A Medicaid Planner Right for Me?
Reference: Kiplinger (July 27, 2022) “Don’t Name Your Estate as Your IRA Beneficiary”