IRA’s Can Be Tricky in Estate Planning

It is becoming increasingly common for clients to hold significant wealth in Individual Retirement Arrangements (IRA's).  IRA's provide tax advantages for retirement savings.  Upon death, IRA's are controlled by Beneficiary Designation Forms that you are requested to fill out upon the establishment of the IRA.  Such Beneficiary Designation Forms control who receives your IRA regardless of what your Will or Trust says.  As a result, it is very important to make sure your IRA Beneficiary Designations are coordinated with your overall Estate Plan. 

For example, you may have created an Estate Plan that leaves everything to your spouse but you established your IRA before you got married and the Beneficiary Designation Form still names another relative or a friend as the beneficiary.  In such a case, your spouse will not be entitled to the IRA.  Additionally, you may want to name a Trust as a beneficiary, particularly if you have a minor or special needs beneficiary.

While it is often important to name a Trust as the beneficiary of an IRA, you must use extreme caution when doing so as there are many traps for the unwary.  Most of the issues surround the effort to preserve the beneficiary's ability to "stretch-out" IRA's as long as possible, only taking the minimum withdrawal possible so that the bulk of the IRA can continue to grow tax free.

One key aspect to protect a "stretch-out" is to make sure the Trust has "conduit provisions," meaning that each required withdrawal  is paid automatically to the beneficiary.  Most basic Trusts do not have such conduit provisions.  A second key aspect to protect a "stretch-out" is to separately name each beneficiary's trust share, rather than naming the entire Trust as the beneficiary.  There is often not enough room to name each beneficiary's separate trust share on the Designated Beneficiary Form and thus you may be required to attach a separate letter to the form.

Regardless of these issues, preserving a "stretch-out" might not be of paramount concern if it is more important to protect a beneficiary's public benefits or to protect a beneficiary from creditors to the maximum extent possible.  As a result, it is very important to seek the counsel of an attorney who has the specific expertise in these matters.