IRA Beneficiary Strategies: Trusts and Charities, SECURE Act Changes, Avoiding Common Errors

Description

Proper beneficiary designations are key to minimizing or avoiding taxation of IRAs, which can be the most significant asset in some estates. The rules surrounding the treatment of inherited IRAs and the taxation of these distributions are complex. The decedent's spouse has many options, including rolling the IRA into his or her own IRA, continuing to own the same account, or taking a lump-sum distribution. Each option has its own requirements and tax consequences.

Recent changes made under the SECURE Act require most other beneficiaries to withdraw an inherited IRA within 10 years after the owner's death. The tax on these withdrawals can be substantial. On the other hand, charities are not subject to income tax, adding to the appeal of charitable beneficiaries.

Designating a trust as a beneficiary provides a level of assurance that the desired beneficiaries will receive the IRA proceeds, the IRA will not be squandered, and/or that funds will be used for specific purposes. The trust instrument must also satisfy specific IRS criteria to be a see-through trust, and the language used must be clear to avoid any misinterpretations.

Listen as our panel of trust and estate experts explains IRA distributions and the related tax consequences. Trust and estate advisers need to understand the nuances of IRA beneficiary designations and how best to handle and correct improper designations.