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Estate as Beneficiary of IRA


When people pass away, their wealth is generally passed on. In the case of passing on your individual retirement account or an IRA, you have two choices. You can name a beneficiary or multiple beneficiaries to receive the income from your IRA distributions or you can designate your estate to be the beneficiary of your IRA. If the estate is the beneficiary, the account assets will be distributed to it and the estate’s heirs will share them, hopefully, based on the owner’s will. If you’re not sure which route to take, consider talking to a financial advisor who can help you figure it out for your estate. 

Designating an Estate as Beneficiary of an IRA

You can make any person a beneficiary of your IRA, who will receive the funds if something were to happen to you. Many people don’t know that you can also name an entity, such as a trust or a business. Your last option is to just let the beneficiary fall to whoever benefits from your estate. This last option might be easier for you because you don’t have to pick an actual beneficiary, but many people believe it is rarely the right decision.

If you choose your estate to be the beneficiary of your IRA it simply means that your IRA funds will go through your estate before your heirs see the money. The money becomes part of your will or potentially part of a probate court process. If you don’t have a will then you’re likely better off just naming a beneficiary on your IRA instead of letting it fall to your estate.

Reasons to Designate Your Estate as an IRA Beneficiary

estate as beneficiary of ira

For most people, simply giving your IRA to your estate isn’t the path you want to take. But in case you are wondering why it might be done, some people might feel that it’s best to designate the estate to be a beneficiary of an IRA for several reasons:

  • It’s easier: For instance, if you have a lot of family members, you may feel like it’s better to let them work everything out, after you are gone, rather than pick one or some beneficiaries and create hurt feelings.
  • You don’t have a strong opinion on where your IRA goesYou may simply not care all that much about what happens to the money. If that’s the case, perhaps making your estate the beneficiary makes sense.
  • You don’t have many potential beneficiaries: Not everyone has children or many family members. But it’s worth mentioning that instead of giving your IRA to your estate, you could make a friend a beneficiary or a charity or an organization, like a university or a library.
  • You want to leave the money to a minor in a trust: You could also give the IRA to a trust and have somebody disperse the money in whatever way you wish. A trust can also be a good idea for somebody who wants to leave the IRA for a minor. If the minor is too young to responsibly handle the money, the trustee could dole out the income to the youth.

When you set up the IRA, you probably named beneficiaries in the beneficiary designation form. On the other hand, if you do have a family, you may have set up the IRA long before you married and had children. If that’s the case and you want to put your family down as beneficiaries, you should your IRA’s administrator and fill out the paperwork to ensure that they will receive your individual retirement account if something would happen to you.

Reasons Not to Name Your Estate as Beneficiary

If your IRA assets are distributed to beneficiaries, they will probably have to abide by a 10-year rule, known as the Setting Every Community Up for Retirement Enhancement (SECURE) Act, in which most beneficiaries are required to take distributions from the funds out of the IRA by the end of 10 years. (Some beneficiaries, such as spouses and people within 10 years of age of the deceased, like a sibling, can take distributions throughout their lifetimes.) If your estate receives the IRA, the funds will be distributed in half that time, within five years, which may not sound bad, since heirs are receiving the same money.

That can be costly, however. Taking distributions within five years, instead of 10, can mean significantly higher taxes and estate administration costs to pay, such as probate fees and so your family would receive less of your wealth. There is another danger to keep in mind when it comes to designating the estate as the beneficiary of an IRA. If creditors are circling your estate, those creditors may end up with all or much of your IRA distributions and not your family, friends, charity or wherever you were hoping your money would do some good.

You also could have an angry family member, perhaps one you would not like to see receive your wealth, insist that they receive money. A court might agree with the family member because you didn’t name any direct beneficiary. So if you name individual beneficiaries to receive your IRA, rather than letting the estate have it, you’ll have more control over how it’s dispersed.

The Bottom Line

estate as beneficiary of ira

The biggest question with your money is whether you care about what happens to that money after you are gone. If you want to have some control over your money after you pass away and if you want your family or perhaps some friends to have as much of your income as possible, you will want to designate beneficiaries to your IRA and not leave it to your estate.

Tips for Estate Planning

  • Whether or not to give your IRA to your estate or select individuals to receive it is a good topic to discuss with your financial advisor. They can help you through the process to see what the best choice is for your unique situation. If you don’t have a financial advisor then finding one doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • As you plan out your entire estate, you’ll want to make sure you don’t miss anything. You can use our free estate planning checklist to help you through the process.

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