Individual Retirement Accounts, also known as IRAs, are often valuable assets in a person’s estate. With an IRA, there are several issues to be considered when initially planning your estate as well as after your death during the estate administration process.
You will want to name as beneficiary the person or persons you wish to inherit your IRA upon your death. If the proper paperwork is done, your IRA will pass to this beneficiary as listed with the custodian, or managing company, of the account. It is important to name a beneficiary so that this person or persons will inherit your IRA without having to go through probate and can then determine how best to receive the money from the IRA. You will want to name a primary and secondary beneficiary of the IRA, just in case the primary beneficiary is not living when the time comes. You can also divide your IRA among a group of people and have multiple beneficiaries who each get a percentage of the account.
As changes occur in your family situation, it is important to periodically verify the beneficiary of your account to make sure it is up to date. If you need to name a different person, you must complete the necessary paperwork with the custodian of the account to change the beneficiary of your IRA. This is a common oversight and recently spurred a decision by the United States Supreme Court which resulted in a ruling that whoever is named as the beneficiary will inherit the account, even if it is your former spouse.
When a person passes away with an IRA as part of their estate, some important information then needs to be gathered. The personal representative or administrator of the estate will need to know the age of the decedent at the time of their death, the value of the IRA account and the beneficiary of the account. This information then influences the handling of other tasks related to the distribution of the asset. First, if the decedent was over the age of 70 ½ and did not take his or her distribution the year of death, then the required minimum distribution must be taken by December 31 of that year.
Secondly, if a spouse is the beneficiary of the IRA, then he or she needs to make a decision. This choice concerns whether they are going to roll the account over into their own name or if they want to treat it as an inherited IRA.
Lastly, if the beneficiary is not the spouse, then the IRA must be established as an inherited IRA. The beneficiary then must determine how they would like to receive distributions from the IRA: take a lump sum, distributions over a 5 year period, or distributions over the beneficiary’s life expectancy.
Obviously, particular attention needs to be given to IRAs and other retirement accounts when assessing your estate. An experienced estate planning attorney can discuss the different options to assist you in completing a comprehensive estate plan.
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