Even though you made sure to
prepare your Last Will and Testament and your Revocable Living Trust, those documents are not always the final word on the
distribution of your assets. Take, for
example, your IRA. An IRA will be
directed by the common beneficiary form–which you may have completed
without thinking through the potential outcome–and not by the terms of your Will or Trust agreement, unless you name your estate or your trust as the beneficiary.
Warning: think twice before designating your
“estate” as the beneficiary of your IRA. This severely limits the distribution (and
taxation) options available to your heirs. This matter was explored in a recent article
in The Slott Report titled “IRAs and Wills Don’t Mix.”
While your “estate” can be the
beneficiary of your IRA, and your Will thereafter determines the distribution of
the retirement funds, this might not be best idea tax-wise. IRAs are very specific and peculiar assets
with very specific inheritance rules. If
your “estate” is the beneficiary of your IRA, then very “unfavorable”
withdrawal rules apply. Instead of the
IRA being withdrawn over the life expectancy of the beneficiary (who may be much younger than the plan owner), the funds must be withdrawn within five years or
perhaps over your remaining actuarial life expectancy if you die prematurely.
Naming your RLT as beneficiary may have disadvantages as well. Some individuals set up separate trusts to be the beneficiaries of their IRAs on behalf of their spouse, children, or other beneficiaries. These trusts can provide a high level of protection from creditors, predators (like ex-spouses), and poor judgment on the part of the beneficiaries. At the same time, these trusts can help maximize the tax benefits of the IRA.
Yes, this can get rather complicated. Make sure you consult with
competent legal, tax, and financial planning counsel when coordinating the distributions from your Will, your Trust, and your IRA.