Tax Insights

Your Guide to State, Local, Federal, Estate + International Taxation

Estate planning: don’t forget your IRA

IRA, estate planning, taxThe IRA is often overlooked when clients meet with their attorney for estate planning. This may be because the IRA owners complete the beneficiary designation form themselves and are unaware of potential pitfalls. Often, the value of the IRA alone far exceeds the value of the planned for estate. Failing to have your attorney review the beneficiary designation and ignoring the IRA during the planning process can lead to more costs post-death to try to correct the mistakes, oversights and loss of tax deferral. Following are just some of the things that can go wrong.

Not naming a beneficiary

Failing to name a beneficiary will cause the IRA to be payable to the estate. This could result in a much shorter timeframe to withdraw the IRA.

Naming your estate as beneficiary

If the estate is named, state law will determine who is entitled to the IRA, which may be different than who the IRA holder intended. Many IRA forms provide the estate as the default beneficiary if none is named. If the personal representative withdraws the IRA and deposits the proceeds in the estate account, the estate or the beneficiaries will be subject to immediate taxation and will lose the potential for tax deferral. If the distribution is taxed in the estate, it may be subject to the highest tax rate at a low-income threshold due to the compressed tax rates.

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Failing to name a contingent beneficiary

This can be a problem if the primary beneficiary pre-deceases the IRA owner or dies after the IRA owner but before the IRA has been re-titled.

Naming the wrong beneficiary

This can occur under a variety of circumstances, such as:

  • Keeping the former spouse on the beneficiary designation after a divorce;
  • Naming the spouse who has more assets as beneficiary;
  • Naming the personal representative (“PR”) the beneficiary, presuming the PR will distribute the IRA to the heirs or intended family members).

In the last case, the IRA owner’s presumption may be misplaced and wrong, as the PR would be under no obligation to do so; the PR would be legally entitled to the IRA based on the beneficiary designation.

Naming an account as beneficiary

Since an account is not considered a designated beneficiary, this would cause the IRA to be payable to the estate.

Naming a charity as beneficiary

A charity is not considered a designated beneficiary, and this can create problems if individuals are also named as beneficiaries.

If you need help designating a beneficiary for your IRA, or other aspects of estate planning, be sure to contact your Henry+Horne professional.

Jennie Ward