Can You Leave an IRA to a Beneficiary?

Can You Leave an IRA to a Beneficiary?

Conversations about death and legacies aren’t always easy. However, defining what matters most to a person is a good way to start estate planning. IRAs can play an important role in estate planning and legacy creation, as discussed in a recent article entitled “IRA Gifts at Death” from The Street.

Let’s say someone has a large portion of their assets in an investment account, a Roth IRA and a traditional IRA. If they want to avoid having their estate go through probate but aren’t in love with the idea of building trusts, they need to be sure their IRAs have beneficiaries. At their passing, the assets will flow directly to the beneficiaries.

Make sure that at least one living beneficiary is on the account. If the primary beneficiary is a spouse, be sure to also have contingent beneficiaries, or designate the beneficiary as “per stirpes,” which means if the named beneficiary passes before the account owner, their share of the assets automatically passes to their lineal descendants.

If there’s no valid beneficiary, the contents of an IRA of any kind could end up in the probate estate, creating a nightmare for heirs.

If an intended beneficiary is a charitable organization, passing an IRA is a powerful giving strategy. The organization must be a 501(c)(3), a tax-exempt organization. When IRAs are passed to the charity, the charity doesn’t pay taxes on the gift.

Individual beneficiaries do have to pay taxes on assets received from traditional IRAs, and when and how much they pay depends upon their relationship to the IRA owner. If the recipient is not the spouse, not a minor and not a disabled adult, the heir will need to take taxable withdrawals from the traditional IRA over the course of ten years from the date of death of the original account owner. Some people take a set amount annually, so they can plan for the taxes due. For others, a low-income year is the time to take withdrawals, since their tax bracket may be lower.

Another IRA distribution strategy is to divide IRAs into separate accounts, allowing for increased control over the amount of assets passing to a specific beneficiary. One IRA could be used for your charitable giving, while another IRA could be used to benefit family members.

Changing beneficiaries on your IRA is relatively easy. Checking on beneficiary names should be done every time you review your estate plan, which should happen every three to five years. Your estate planning attorney will be able to help determine the best strategy for your IRAs. Generally speaking, traditional IRAs are best to gift for charities. Roth IRAs are best to gift to family or loved ones. This is because the money in a Roth IRA is inherited tax free and can remain tax free for a number of years.

Reference: The Street (July 17, 2022) “IRA Gifts at Death”

How to Keep the Vacation Home in the Family

How to Keep the Vacation Home in the Family

There are several ways to protect a vacation home so it remains in the family and is not overly burdensome to any one member or couple in the family, according to the article “Estate planning for vacation property” from Pauls Valley Daily Democrat.

To begin, families have the option of creating a legal entity to own the asset. This can be a Family LLC, a partnership or a trust. The best choice depends upon each family’s unique situation. For an LLC, there needs to be an operating agreement, which details management and administration, conflict resolution, property maintenance and financial matters. The agreement needs to include:

Named management—ideally, two or three people who are directly responsible for managing the LLC. This typically includes the parents or grandparents who set up the LLC or Trust. However, it should also include representatives from different branches in the family.

Property and ownership rules must be clarified and documented. The property’s use and rules for transferring property are a key part of the agreement. Does a buy-sell agreement work to give owners the right to opt out of owning the property? What would that look like: how can the family member sell, who can she sell to and how is the value established? Should there be a first-right-of refusal put into place? In these situations, a transfer to anyone who is not a blood descendent may require a vote with a unanimous tally.

There are families where transferring ownership is only permitted to lineal descendants and not to the families of spouses who marry into the family.

Finances need to be spelled out as well. A special endowment can be included as part of the LLC or as a separate trust, so that money or investments are set aside to pay taxes, upkeep, insurance and future capital requirements. Anyone who has ever owned a house knows there are always capital requirements, from replacing an ancient heating system to fixing a roof after decades of a heavy snow load.

If the endowment is not enough to cover costs, create an agreement for annual contribut6ions by family members. Each family will need to determine who should contribute what. Some set this by earnings, others by how much the property is used. What happens if someone fails to pay their share?

Managing use of the property when there is a legal entity in place is more than a casual “Who calls Mom and Dad first.” The parents who establish the LLC or Trust may reserve lifetime use for themselves. The managers should establish rules for scheduling.

For parents or grandparents who create an LLC or Trust, be sure it works with your estate plan. If they intend to keep the property in the family and wish to leave a bequest for its maintenance, for instance, the estate planning attorney will be able to incorporate that into the LLC or Trust.

Reference: Pauls Valley Democrat (July 29, 2021) “Estate planning for vacation property”