of the spouse. It also allows further “stretching” of the IRA as the spouse can spread the RMDs over their lifetime plus the lifetime of a beneficiary.
If the spouse is more than 10 years younger than a non-Roth IRA owner, their life expectancy can be used. Beneficiaries other than the spouse, who are more than ten years younger than the IRA owner, are treated as being no more than ten years younger for RMD purposes. This is another “stretching” advantage for naming the spouse as beneficiary.
Children
If children are beneficiaries, they can take the RMDs over their life expectancy. Since the RMDs are very low at the younger ages, the account can grow substantially over the years. For example, a $100,000 IRA could distribute literally millions of dollars over the lifetime of a young beneficiary.
If there is more than one child named, the youngest age is used for RMD purposes. However, if the children are beneficiaries of a trust, the oldest age is used.
Grandchildren
Because grandchildren are even younger than children are, the lifetime income potential from RMDs would floor you. I can show you an example of the same $100,000 IRA used above as an example that would pay out 20 million dollars to a grandchild over their lifetime under the right circumstances.
Naming a grandchild gets into the generation skipping transfer tax area. But each person has a lifetime generation-skipping transfer tax lifetime exemption of $2,000,000 (in 2006). In any case, I would consult a tax attorney to make sure this beneficiary election coordinates with the balance of your estate plan.
A Trust
There may be some good reasons to name a trust as the beneficiary of your IRA. Your estate could be large enough so that you do not want your IRA to be subject to taxation twice. You may want to take advantage of the marital deduction, control where the balance of your IRA goes after the death of your spouse or have a spouse that is not a U.S. citizen.
These objectives need to weighed against the ability of your spouse to treat your IRA as their own with the attendant advantages. If a trust is the beneficiary, the spouse cannot make this election, even if they are the only beneficiary of the trust.
There are other beneficiary options beyond the scope of this article. I hope it is clear that there is no rubber stamp best beneficiary election. Prior to making a beneficiary choice, thought needs to be given to your estate, your family's circumstances, the rules and your wishes.
In many cases, you should consult a tax attorney. The examples I have used here are my understanding of the rules and cannot be relied upon as tax advice.
Robert D. Cavanaugh, CLU is a 36 year financial and veteran and author of the free newsletter, “The Estate Preservation Advisor”. To subscribe and get the free video, “How to Sell Your Life Insurance Policy for More Than the Cash Value”, go to theestatepreservationadvisor.com/freevideo.htm
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