There are often times when professionals should just adhere to their individual disciplines. When they choose to go outside of their known realm of expertise, they can give incorrect advice that can cost a client thousands of dollars. Consider the following hypothetical situation: A person, on the suggestion of his attorney, wants to change the beneficiary on his IRA from his wife to his estate. His wife was placed into a nursing home because of Alzheimer’s, so the change in beneficiary was prudent. The mistake may be making the estate the beneficiary for the following reasons:
- Any property with a named beneficiary is property which passes outside of the probate estate directly to the beneficiary.
- If the children are named as beneficiaries, they are eligible for the “stretch” IRA strategy, which allows them to take withdrawals over their life expectancy.
- By using a “stretch” IRA provision, taxes are paid on amounts withdrawn during the year of withdrawal.
- If the estate were named the beneficiary, the amount of the IRA may have to be probated and would not pass expeditiously to the beneficiaries.
- With the estate as beneficiary, the IRA, by law, would be liquidated forcing ALL of the taxes to be paid at the time of the liquidation. Stretch IRA provisions would not be allowed.
Conclusion…You should consider naming an individual as beneficiary of an IRA if you are interested in utilizing the stretch IRA provisions. This means that all monies can continue to accumulate tax deferred, and the only current taxation will be on the amount required to be distributed each year. Make sure to check with a CPA or investment professional before any property is sold or liquidated to confirm any adverse tax consequences. Once liquidation is done…it’s too late. Try placing toothpaste back in the tube or un-ringing a bell.