The Individual Retirement Account has been available since 1974. Most Americans today have some type of a tax deferred account. Any tax deferred account is distributed upon death by the directions you have placed in writing with the institutional custodian holding your account. Here are several alternatives for beneficiary designations.
MY ESTATE AS THE BENEFICIARY.
This is normally the worst choice. If you have a will, that document will direct distribution. If you do not have a will the account will pass by state law under the statute of descent and distribution. You have now taken a non probate asset and placed it within the jurisdiction of the probate court.
MY SPOUSE.
This allows the most flexibility. Your spouse can continue to defer the payment of income tax. This also allows the spouse the ability to determine the beneficiaries at his or her death. For high net worth couples, advanced planning with IRAs is essential.
CHILDREN
Children as primary beneficiaries offer a great way to give a child an automatic retirement fund. If each child is designated as a separate beneficiary, he can continue to defer part of the account over his own life expectancy. In a second marriage situation an IRA is a great tool. The designation to children of the first marriage allows a guaranteed inheritance without involving the second family. If done properly it cannot be challenged.
GRANDCHILDREN
Designation to grandchildren can provide the longest deferral of the payment of income tax. If a two year old is a named beneficiary he can receive income over a life expectancy of over eighty years.
REVOCABLE TRUST
A trust will allow you to control the funds after your death. It permits a trustee to allocate among a class of beneficiaries or direct the use of the funds. It also allows the retention of funds if a child is not mature enough to receive the funds. A trust can delay the immediate unrestricted access to the monies by your children.
CHARITY
The use of IRAs to distribute to a charity is a great tax saving vehicle. If you want to give to charity, the monies will go directly free of probate and free of the payment of income tax upon presentation of a death certificate. If the distribution had come directly from the trust, income tax would have first been paid and only a portion of the funds would have gone to the charities.
The purpose of this article is to make you aware of the importance of the written beneficiary designation form. Remember to name a contingent beneficiary or we will watch the asset pass through the estate. Good luck.
Jeff Roth is a partner with David Bacon and associate Jessica Moon of the firm ROTH and BACON with offices in Port Clinton, Upper Sandusky, Marion, Ohio and Fort Myers, Florida. All members of the firm are licensed in Ohio and Florida. Mr. Roth’s practice is limited to wealth strategy planning and elder law in both states. Nothing in this article is intended for, nor should be relied upon as individual legal advice. The purpose of this article is to provide information to the public on concepts of law as they pertain to estate and business planning. Jeff Roth can be reached at [email protected] (telephone: 419-732-9994) copyright Jeffrey P. Roth 2012.
