IRA beneficiary

Submitted by Grace DeZego on Thu, 2023-07-06 16:12

Dear Ed Slot,

In my will, upon my demise, the will becomes a testamentary trust leaving everything to my 3 grandchildren at ages 25, 30, and 35. My nephew is the executor of my will. Originally, I was advised to name my 3 grandchildren as beneficiaries on all my investments. Afterwards, I was advised to remove their names and change the beneficiaries to “The Estate of Grace DeZego”. However, 2 accounts are IRAs and I recently learned that I should not have changed their names to The Estate of Grace DeZego on the 2 IRAs as the beneficiary. To make matters worse, the IRAs were not set up to have RMDs withdrawn from the beginning in Sept. 2021. Therefore, that must be corrected and I will have to take the RMDs, plus pay a penalty.

When I change the 2 IRA beneficiaries back to the names of my 3 grandchildren, how can I avoid them getting the money outright from the IRAs upon my demise? The IRAs do not become part of the testamentary trust, correct?

A suggestion was made to use the phrase Restricted Beneficiary. Can you explain what that means and is it the terminology I need in order to sprinkle my grandchildren’s inheritance. If you wish to speak to me or if you have questions for me, I can be reached at 917 750-6160.



Submitted by Alan - IRA critic on Thu, 2023-07-06 16:51

  • Correct that your IRAs should not name your estate as beneficiary. But if you feel that the trustee of a trust for your grandchilden is needed to limit their distributions, you could establish a testamentary trust in your will and your IRA beneficiary would then be the “testamentary trust created in my will”. The trustee of the trust can control the distributions out of the trust to the grandchildren, but the inherited IRA will still have to be drained in 10 years to the trust but the trust can retain these distributions and include provisions for which the trustee can make distributions. The terms of the trust should be those that qualify it for look through treatment. The trust will have to file a 1041 each year and income not passed through to the beneficiaries will be taxed at the higher trust tax rates. Once you are sure that the grandchilden are responsible adults capable of handing an inheritance you could just change the IRA beneficiary to them individually. To be clear, once the grandchildren are no longer minors, the only way to limit their access to these funds is to name a trust (including a trust created in your will) as the IRA beneficiary. 
  • If you pass after your own RMDs begin, the inherited IRA will be subject to annual RMDs in years 1-9 of the 10 year rule period. If the children are minors these distributions might be large enough to trigger the kiddie tax using the parent’s rate. 
  • Sorry, we do not directly contact posters here other than in this forum. 

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