Inherited IRAs: Naming Your Beneficiary

Over the last few years there have been a number of changes about how the IRS treats inherited IRAs and the necessary provisions if you name a trust as the IRA beneficiary. On June 12th of this year, the United States Supreme Court unanimously ruled in the Clark case that inherited IRAs are not afforded the same protections from creditors as regular IRAs. We don’t yet have certainty about the impact of this decision for Alaskans. These changes make this a great time to think again about who you have designated as beneficiary for your IRAs.

Following are some general guidelines on naming the beneficiary for your IRA. Remember, though, that there are always exceptions to the rules. One of the benefits of the being a Generations member is that we’re here to help you assess your options.

In most circumstances, if you are married, the primary beneficiary should be your spouse. Having your spouse as the beneficiary allows them, upon your death, to make your IRA their own. This gives the greatest flexibility to “stretch out” the distributions from the IRA, have creditor protection, and get maximum tax deferral. However, asset protection concerns for your spouse in the event of your death, such as creditors or potential nursing home costs, might favor a different beneficiary.

If your spouse does not survive you, or if you have no spouse, the question of who to name as beneficiary is a bit more complicated. The answer depends upon the size of the IRA and, if there are multiple beneficiaries, the difference in their ages.

If the size of each beneficiary’s IRA share is too small to make sense of stretching out distributions over their life expectancy, you may want to name them directly as beneficiaries unless asset protection is a concern, in which case you might name your trust.

Naming a trust as beneficiary of an IRA adds an element of creditor protection that’s not present when an individual is the named beneficiary.

If you want to have the beneficiaries receive distributions in annual increments over their life expectancies, and you name your living trust as the beneficiary, the oldest beneficiary’s life expectancy is used to determine the payout period for all of the shares.

Instead, it may be a good idea to name the individual inherited trust shares as the beneficiaries of the IRA. This gives each beneficiary the ability to receive distributions over their life expectancy while their inheritance is still protected from creditors, judgments, and possible divorces. For this to work your trust must have “conduit” provisions, which are included in most of our recent trusts.

Another option, when you want different provisions for the distribution of the IRA than for the rest of your assets, is to use stand-alone IRA beneficiary trusts. This option is probably only viable if the IRA is worth enough to justify the costs of creation and administrative expenses of having separate trusts for the beneficiary IRAs, but it does provide excellent asset protection.

If you have any questions about your IRA beneficiaries, please do not hesitate to contact our office.