Should I Name My Estate or Living Trust as the Beneficiary of My IRA or Retirement Plan?

Supercharge Your IRAIf you read our previous articles on the power of IRA and retirement plan "stretchout" planning and what happens to your IRAs and retirement plans upon death, you might think that a positive solution would be to name your estate as your beneficiary so that the executor you’ve chosen can manage your retirement plans for you.  You chose them because they're responsible and you trust them, so what’s the harm, right?

Unfortunately, the IRS rules require that if you designate your “estate” as the beneficiary of your retirement account, then the retirement account MUST be distributed according to the 5-year distribution rule. There is no Inherited IRA “stretchout” option.

Likewise, if you think that you'll be able to name your Living Trust as the beneficiary of your retirement plan, you’ll also run into similar problems. The IRS rules for qualifying for the Inherited IRA “stretchout” option are extremely specific, and a Living Trust typically will not qualify. Thus, if you name your Living Trust as the beneficiary of your retirement plan, your family will again be stuck with the mandatory 5-year distribution option upon your death, causing the account to be prematurely taxed thereby losing the benefit of tax-deferred growth.

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Jackie Bedard
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Attorney, Author, and Founder of Carolina Family Estate Planning