What are the options for distributing an IRA?

What are the options for distributing an IRA?

  • October 2, 2013

IRAs are the most difficult asset type when it comes to probate and trust settlement.  Therefore, if you don't hire an experienced estate planning attorney to help with the other aspects of the settlement, please get help with the IRA.  The rules are complex and the mistakes tend to have huge consequences.

Basically, upon the death of the IRA owner it goes to the individuals and entities specified in the beneficiary designation.  If a trust is named there are additional complications.  Trusts are frequently used as beneficiaries as IRAs to provide asset protection.  Trust rules are complicated and there is a wide misunderstanding of rules in the financial industry.

During a probate or trust settlement, if the decedent was older than 70 1/2, it must be determined if he or she took out their required minimum distribution for the year of death.  If they didn't, then the required minimum distribution must be taken out in the name of the estate prior to distributing the IRA to beneficiaries.

When a beneficiary inherits an IRA they cannot combine it with their own IRAs and special distribution rules apply.  When Bill Sample dies and his IRA is inherited by his son, Junior, the IRA remains in Bill's name with Junior indicated as the beneficiary.  This is called a "beneficiary IRA" and Junior must start taking out a required minimum distribution that is based upon his age at the time the beneficiary IRA was created.  Unlike a regular IRA there is no early withdrawal penalty if the beneficiary is under the age of 59 1/2.  If Junior does not start taking out the minimum distributions beginning with the year following the year of Bill Sample's death, then he must take out the entire IRA within 5 years.