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Selecting Beneficiaries for Your IRA Account

When setting up your IRA, it’s important to take some time and think about who you would like to name as your beneficiaries. If you fail to name a beneficiary to your account, your IRA assets would go to your estate and could be taxed at a much higher rate.

If you are married, you will most likely want to name your spouse as the primary beneficiary. Even if you have a family trust, it’s still a better idea to make your spouse the beneficiary. A spouse can treat an inherited IRA as their own, which is an option that is not available to any other type of beneficiary, including trusts. If you name a trust your beneficiary, the trust would only have three options: take a lump sum distribution from the IRA, take distributions out over the next five years, or, if the deceased account holder was over the age of 70 ½ and was already taking Required Minimum Distributions, the trust could continue taking the RMDs based on the age of the deceased account holder.

I read an article a while back in which a man named his Family Trust as his primary beneficiary, instead of his spouse. The family had paid quite a bit of money to their attorney to set up the trust and the man knew all the advantages of having the trust, so he figured that making the trust the beneficiary was obviously the best thing to do. When the man passed away, the woman sat down with her attorney to discuss her options regarding the IRA. She told the attorney that she wished to treat the IRA as her own, but the attorney had to tell her that was not an option because the Trust, a non-individual, was the beneficiary.

The woman ended up going to court and in this particular case, the judge ruled that the woman could treat the IRA as her own because he believed her husband had intended for her to be able to do this, but had just made an error in judgment when designating the IRA beneficiaries. She eventually got what she wanted, but she had to spend the time and money of going through the court system. This could have easily been avoided if her husband had just named her the primary beneficiary in the first place.

If you have questions about IRA beneficiaries, please be sure to talk to your CPA or tax professional.  What does the IRS says about beneficiaries?

Terry White

About Terry White

I started my business career after getting my degree in Accounting from the University of New Mexico in 1983. My first job was as a controller for a local title company, and in 1987 I started First Financial Escrow, Inc. Over the years I played a part in several startup companies including First Financial Equities, Inc., First Financial Trust, Inc., First Financial Marketing, Inc. and Asset Ventures, Inc. In 1997 First Financial Escrow, Inc. was able to purchase the escrow accounts from Sunwest Bank and changed its name to Sunwest Escrow. As the market changes, Sunwest has grown and changed along with it. Besides my wife, Sheila, we have three boys, two daughters-in-law, one grandson, another grandson on the way and a future daughter-in-law. Sunwest is my passion, and I enjoy coming to work every day to see what will happen next. I enjoy fly fishing, spending time in Colorado, biking and watching my boys play soccer.