Good chess players plan for the endgame right from their opening moves. Personal finance is no different. Anyone with a spouse or partner, or who has family to whom they might want to leave a legacy, should understand the rules concerning beneficiaries for IRAs and how spousal and inherited IRAs are treated. Plus, depending on the family member, Self-Directed IRAs may need some additional attention because they are by their nature more complicated to run than an inherited IRA that consists of some CDs and mutual funds.
Should I Name a Spouse as a Direct Beneficiary of a Self-Directed IRA?
Not necessarily. While this approach may work well for more conventional retirement accounts, your real estate, partnership, LLC or other assets within a Self-Directed IRA may rely quite a bit on your own personal expertise within a specific investment field. If your spouse doesn’t understand your investment strategy, or how these assets work within the IRA, then leaving a Self-Directed IRA directly to a spouse as a named beneficiary may not work well.
Instead, you may consider creating a trust to administer the IRA, and instead of naming your spouse as a named beneficiary to the Self-Directed IRA, you name the trust as beneficiary on the IRA paperwork itself. Meanwhile, you name your surviving spouse as the beneficiary of the trust.
Upon your death, your IRA will pass directly to the trust under contract law, bypassing probate and all those probate fees – provided you did the paperwork properly.
When you create a trust, you can then name a trustee to administer the Self-Directed IRA for the benefit of the trust’s beneficiary. This should be someone of impeccable character who thoroughly understands the investments within your Self-Directed IRA and how to responsibly liquidate them to provide income for your survivors.
Otherwise, your surviving spouse, in your absence, may make a transactional error that liquidates the assets for less than their real market value, or – worse – do something that causes the IRS to disallow the IRA entirely, causing needless immediate income tax liability and penalties.
Do You Have Children from a Prior Marriage?
The existence of children from a prior marriage is always a delicate issue. If you leave the Self-Directed IRA directly to a spouse as a named beneficiary, that individual could treat that spousal IRA as his or her own, turn around and name his or her own children as eventual beneficiaries in the event of his or her death. Children from the previous marriage would be disinherited.
Naming a trust as a beneficiary may prevent this occurrence, because you can set up all your own children, equally, as contingent beneficiaries of the trust. In the event your surviving spouse passes away, all your children stand to inherit your legacy. Your surviving spouse cannot favor his or her own offspring.
You will need an attorney to draw up a trust. The specific language used within a trust can have a big impact on how effective the trust is and whether the trust serves the financial and strategic objectives you originally intended.
Note: Surviving spouses have important options with inherited IRAs that are not available to other individuals. For example, the surviving spouse can elect to treat the IRA as his or her own. This means the IRA would be transferred into his or her own name, and if the IRA has not already been subject to required minimum distributions, your spouse can then elect to put off any mandated distributions until April 1 of the year after the year in which he or she turns 70½.
If the surviving spouse is much younger than you, that could be a valuable benefit. But you give up that potential benefit if you leave a trust as the beneficiary, rather than naming your spouse.
These are items to discuss with your family members, as well as your financial advisors. If you want to learn more about Self-Directed IRAs and discuss with us the rules and regulations concerning them, please do call us at 866-7500-IRA (472) or visit us online at www.AmericanIRA.com. We will be happy to send you one or more of our exclusive Self Directed IRA investing guides at no cost to you. Or you may wish to download our invaluable, free e-book on the subject.
As always, we are standing by to answer any of your questions, and to make it easy for you to take personal charge of your retirement investments.
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