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IRA Beneficiary Designation May Not Be So Simple

When it comes to estate planning on IRAs, 401Ks, and other Qualified Retirement Plans, one may want to take into consideration the complexities with these types of accounts. Here, we discuss why an IRA beneficiary designation is actually a complex process.

Challenges in IRA Beneficiary Designation

Under Federal Law, the primary beneficiary of a married couple must be the spouse unless the spouse gives written consent to distribute elsewise. This is the simple part.

Who gets listed as the contingent beneficiary is a bit more complex. If the children are too young to inherit an IRA, then a Living Trust may make sense. However, keep in mind that if there are multiple beneficiaries, the trust must take annual distributions based on the oldest beneficiary’s life expectancy. This may be poor beneficiary planning for a family that has children with large age gaps. Another thing to consider with Trusts is taxes; a trust can pay much higher income taxes than individuals.

Family Matters

If the children are older and financially mature, then the IRA owner may decide to name the children individually as contingent beneficiaries. However, one should take into consideration the possibility of a child getting sued or even worse divorced. Remember, the automatic primary beneficiary designation is the spouse of an IRA owner. This means that the child’s spouse may inherit the IRA instead of the grandchildren in cases of the child’s death. This is not what most IRA owners intend when filling out beneficiary forms and setting up estate plans.

Due to the complexities of IRA estate planning, it is highly advisable that one consult with a Certified Financial Planner (CFP®) that understands complex IRA planning rules and a qualified estate attorney that can give comprehensive legal advice. It is strongly recommended that the CFP® and Estate Attorney work together to build a strong plan on behalf of the client.

 At Chatterton & Associates, our team of expert financial advisors work closely with our clients to protect their wealth and ensure that their inheritance is securely passed along to their loved ones. Contact us today to speak with one of our certified advisors.

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