The IRS recently issued a ruling that illustrates the importance of designating a beneficiary for an individual retirement account (“IRA”).  Generally, tax deferral is available if you designate a beneficiary on your account before you die.  If the account does not have a  designated beneficiary, however, it must be fully distributed within five years after death. 

If you die before distributions begin from your account (before you turn 70 1/2) and the account has a designated beneficiary, the balance of the account can generally be distributed over the designated beneficiary’s lifetime using his or her life expectancy as set forth in IRS tables.  Many times, this is referred to as a “stretch IRA.”   

If you are over 70 1/2 and have started receiving your minimum distributions, distributions continue to be made over your remaining life expectancy IF you have NOT designated a beneficiary.  If the account has a designated beneficiary, though, distributions can be made over your remaining life expectancy or the life expectancy of the designated beneficiary, whichever is longer.  For example, if you name your child as your beneficiary, she can use her life expectancy calculation to receive distributions.  If you named your father instead, he would use your life expectancy calculation.  Should you name more than one beneficiary on your IRA, then the age of the oldest beneficiary is used to determine the distributions. 

Normally, tax advisors recommend that their clients name individuals as beneficiaries of IRAs in order to stretch out distributions.  What happens, though, if you have minor child who would be your beneficiary?  You might not want to name him as beneficiary, but rather a trust for his benefit.   In that regard, distributions would need to paid out over a five year period, unless the trust included so called ”look through” provisions.  What this means is that we could look through the trust and at the beneficiary of the trust to use his or her life expectancy to stretch out those distributions. 

Since this is a very technical matter, it is important to communicate with your advisory team on your wishes for your family so that your estate planning documents and your beneficiary designations are properly coordinated.  If you have any questions or want to discuss these matters, you’re always welcome to contact our office.