Individuals who have dutifully saved and invested their money during their lifetime oftentimes have large IRA accounts. In some cases, it may be important to think about how to name the beneficiary designations where such large IRA accounts exist.
Many individuals do not realize that the money that they have saved in their employee benefit accounts or IRA accounts are subject to income taxes by the recipient, as well as estate taxes on the account upon the death of the IRA owner.
Generally, revocable living trusts should not be named as a beneficiary of an IRA account or any other retirement account. When dealing with the transfer of retirement accounts, the goal is always to allow the beneficiary to spread out the payments received from the IRA to defer the payment of income taxes. By having the payments spread out over the life expectancy of the youngest beneficiary, the beneficiaries are able to defer the income taxes by receiving smaller payments as opposed to receiving one large lump payment subject to income taxes.
If one’s revocable living trust were named as a beneficiary instead of an individual, the trust cannot stretch out the distributions over time, as the IRS deems that a trust does not have a life expectancy. The trust would then receive the full lump payment of the IRA subject to income taxes at the trust’s tax rate. Therefore, the typical advice is to name an individual as the beneficiary of an IRA or other retirement account. (e.g. one’s spouse as primary beneficiary and adult children as secondary beneficiaries receiving equal shares).
Disclaimer of Liability: This informational sheet is only provided as a public service to increase awareness of issues surrounding Estate Planning. While the information on this sheet is about legal issues, it is not legal advice or legal representation.