By Barry W. Oliver, CPA/PFS
One of the most important estate-planning decisions for investors is how to properly designate beneficiaries of their retirement accounts. In most scenarios, the logical choice is to designate individuals as beneficiaries—as opposed to the estate—to allow for the IRAs, once inherited, to “stretch” the distributions for as long as possible. The longer the IRA is sheltered from taxes, the more potential it has to grow and accumulate wealth. Naming an individual is a simple and strategic method to stretch an IRA. However, the real world is not always simple, and there are often other factors to consider when determining beneficiaries.
Many times, it is in the account owner’s best interest to name trusts as beneficiaries of IRAs. If done correctly, this can preserve the stretch capabilities for the beneficiaries and allow the account owner to have control over the ownership and distributions after he or she is deceased. If done incorrectly, this can “kill the stretch” and force distributions to be made—and taxes to be paid—more quickly than what was intended.
As a result, it is critical that a competent attorney and tax professional be directly involved when deciding whether to name a trust as a beneficiary. An advisor may offer guidance by identifying potential issues for an individual to share with his or her team of professionals.