As Financial and Family Estate Planners we receive many questions and requests regarding Individual Retirement Accounts (IRAs). An IRA is a qualified retirement plan. Contributions are tax deductible and tax-exempt growth is compounded. As a Planner you can assist your clients turn their modest tax-deferred account into millions for their family. Depending on who is named as beneficiary, one can keep this money growing tax-deferred for not only their and their spouse’s lifetimes, but also for their children’s or grandchildren’s lifetimes. Designation of a spouse to have full control of the money after death is normal beneficiary designation. The following are commonly asked questions:

Are there any disadvantages of naming my spouse? Your spouse will have full control of this money after you die and is under no obligation to follow your wishes. This may not be what you want, especially if you have children from a previous marriage or feel that your spouse may be too easily influenced by others after you are gone. Also, if your spouse becomes incapacitated, the court could take control of this money. It could be lost to your spouse’s creditors. Finally, naming your spouse as beneficiary can cause your family to pay too much in estate taxes. (More about this later.) If any of this concerns you, keep reading. Naming my Children, Grandchildren, Others If your spouse will have plenty of assets after you die, if you have reason to believe your spouse will die before you, or if you are not married, you could name your children, grandchildren or other individuals as beneficiary(ies). This will let you stretch out your account without the spousal rollover. Remember, after you die, the distributions can be paid over your beneficiary’s life expectancy.

Are there any disadvantages? Anytime you name an individual as beneficiary, you lose control. After you die, your beneficiary can do whatever he/she wants with this money, including cashing out the entire account and destroying your carefully made plans for long-term, tax-deferred growth. The money could also be available to the beneficiary’s creditors, spouses and ex-spouses. And there is the risk of court interference at incapacity. If any of this concerns you, consider using a trust. Naming Trusts Naming a trust as beneficiary will give you maximum control over your tax-deferred money after you die. That is because the distributions will be paid not to an individual, but into a trust that contains your written instructions stating who will receive this money and when. For example, your trust could provide income to your surviving spouse for as long as he or she lives. Then, after your spouse dies, the income could go to someone else. The trust could even provide periodic income to your children or grandchildren, keeping the rest safe from irresponsible spending and/or creditors. While you are living, the required minimum distributions will still be paid to you over your life expectancy. After you die, the required distributions can be paid to the trust over the life expectancy of the oldest beneficiary of the trust. The trustee can withdraw more money if needed to follow your instructions, but the rest can stay in the account and continue to grow tax-deferred. You can name anyone as trustee, but many people name a bank or trust company, especially if the trust will exist for a long period of time. Are there any disadvantages? You will not be able to provide for your spouse and stretch out the tax-deferred growth beyond your spouse’s actual life expectancy. That is because you must use the life expectancy of the oldest beneficiary of the trust which, in this case, would probably be your spouse. Also, many trusts pay income taxes at a higher rate than most individuals, but this only applies to income that stays in the trust. (If you have a revocable living trust, this would only happen after you die.) Distributions from your tax-deferred account that are paid to the trust are subject to income taxes. And if the money stays in the trust, the higher tax rates would apply. But usually this is not a problem because the trustee distributes the money to the beneficiaries of the trust, who pay the income taxes at their own rates. Finally, the trust must meet certain IRS requirements, including that it is a valid trust under state law.