Naming Beneficiary on Roth IRA
I have a client who recently inherited her husband’s Roth IRA, worth about $400,000. She is going to put the IRA in her name. She has 10 children and also has a Trust setup in her name. I always suggest putting a human being down as beneficiary of an IRA unless there is a control issue. Thus, I would recommend to this client to list her 10 children as beneficiaries of her IRA, so that they can each stretch their share over their life expectancy (there is about 30 years difference in the ages of her oldest and youngest children). Is this the right approach? The alternative would be to name her Trust as Beneficiary.
Thanks – Julie Brangenberg
Permalink Submitted by Alan Spross on Fri, 2009-08-21 19:15
It is probably best to name them each as designated beneficiaires. If any of the children are special needs cases or have creditor exposures or other related problems, she could separate those children and make them trust beneficiaries, and then partition the Roth into two accounts, one going to the individuals and the other showing the trust as beneficiary.
Any trust should be qualified for look through treatment, and the oldest beneficiary’s life expectancy will apply to all trust beneficiaries. In the event that the trust beneficiaries happen to be widely diverse in age, then separate trusts can be considered.
There should be some advice passed through to the beneficiaries on what to do in setting up separate accounts on a timely basis and starting life expectancy RMDs on time. She should also make sure that the Roth agreement provides for life expectancy distributions for beneficiaries rather than the 5 year rule, since there still might be some agreements out there that do not default to life expectancy. A Roth owner is considered to pass prior to their RBD, since there is no actual RBD.
Permalink Submitted by Bruce Steiner on Mon, 2009-08-24 04:18
I don’t know what you mean by “her” trust.
She can leave her IRAs (traditional or Roth) to her children (or anyone else) either outright or in trusts for their benefit. The trusts for her children (if she provides for her children in trust rather than outright) can be in her Will, or in a separate trust instrument.
She might leave her IRAs to her children in trust rather than outright for the same reasons she might leave her other assets to her children in trust rather than outright: to better protect their inheritances from potential creditors (including spouses), and to keep the inheritances out of the children’s estates for estate tax purposes. Assuming her Will (or the separate trust instrument) is properly drafted, her children will still be able to stretch the benefits out over their life expectancies, or, more likely, over the oldest child’s life expectancy (since the oldest child will probably be a contingent beneficiary of the other children’s trusts, if a child dies without leaving any issue).
On the other hand, a $400,000 IRA divided 10 ways is only $40,000 per child, so unless the reasons for leaving the IRA in trust are compelling, it would be much simpler to leave the IRA to the children outright, even if she leaves her other assets to her children in trust.
Bruce Steiner, attorney
NYC
also admitted in NJ and FL