Passing IRA via will

[orangeGrower]

What is the name of your state (Arizona)?

I am updating my will, and own an IRA as well as other accounts. I am reluctant to name beneficiaries on my IRA account (POD's) because two of my heirs can't be trusted with a large sum of cash.

Can I pass the IRA through my will where I can exercise a little more control, like naming a trustee for some number of years or specifying that the money must be used to buy an annuity?

Will the IRA pass as an IRA, or will it have to be cashed out with taxes and penalties before it can be paid out of my estate? I have other heirs who can be trusted with a large sum, and I would prefer not to penalize all of them because of constraints I put on two of them.

The solution doesn't have to be perfect. I'm trying to the best I can for the two problem heirs, but if they get around my restraints I will be satisfied that I tried.

 

[LdiJ]

What is the name of your state (Arizona)?

I am updating my will, and own an IRA as well as other accounts. I am reluctant to name beneficiaries on my IRA account (POD's) because two of my heirs can't be trusted with a large sum of cash.

Can I pass the IRA through my will where I can exercise a little more control, like naming a trustee for some number of years or specifying that the money must be used to buy an annuity?

Will the IRA pass as an IRA, or will it have to be cashed out with taxes and penalties before it can be paid out of my estate? I have other heirs who can be trusted with a large sum, and I would prefer not to penalize all of them because of constraints I put on two of them.

The solution doesn't have to be perfect. I'm trying to the best I can for the two problem heirs, but if they get around my restraints I will be satisfied that I tried.

Unfortunately, unless direct trustee to trustee rollovers can be done, there will be tax consequences to your heirs if you try to protect the money. The only way that tax can be deferred is in a direct trustee to trustee rollover into an IRA of their own.

So, you are going to have to decide if protecting it is important enough that taxes on the lump sum will need to be paid.

 

[anteater]

LdiJ - I think that you are misinterpreting this one.

Can I pass the IRA through my will where I can exercise a little more control, like naming a trustee...

You are on the right track. But a trustee implies that there is a trust, right?

A trust - inter vivos or testamentary - can be an IRA beneficiary. And spendthrift beneficiaries are one reason why one might wish to do so.

But, this is one that you don't want to do at home. A small mistake can nullify what you are trying to accomplish. If you are talking about a potentially large amount in the IRA, spend a few bucks with an estate planning professional to be certain that it gets done correctly. (And, before you get too far, check with the IRA custodian to be sure that the custodian understands what you are doing. Some custodians can be pretty dense.)

 

[LdiJ]

LdiJ - I think that you are misinterpreting this one.


You are on the right track. But a trustee implies that there is a trust, right?

A trust - inter vivos or testamentary - can be an IRA beneficiary. And spendthrift beneficiaries are one reason why one might wish to do so.

But, this is one that you don't want to do at home. A small mistake can nullify what you are trying to accomplish. If you are talking about a potentially large amount in the IRA, spend a few bucks with an estate planning professional to be certain that it gets done correctly. (And, before you get too far, check with the IRA custodian to be sure that the custodian understands what you are doing. Some custodians can be pretty dense.)

I did not say that a trust could not be a beneficiary. I stated that unless trustee to trustee rollevers can be done, into IRAs for the individual heirs, there will be a tax consequence.

 

[anteater]

I did not say that a trust could not be a beneficiary. I stated that unless trustee to trustee rollevers can be done, into IRAs for the individual heirs, there will be a tax consequence.

OK. But, since there wasn't any question about rollovers, I thought that you had.

 

[LdiJ]

OK. But, since there wasn't any question about rollovers, I thought that you had.

I was addressing this question:

Will the IRA pass as an IRA, or will it have to be cashed out with taxes and penalties before it can be paid out of my estate? I have other heirs who can be trusted with a large sum, and I would prefer not to penalize all of them because of constraints I put on two of them.

A trust can be a beneficiary, and control the money and dole it out in a way that protects the heirs from blowing it all in a short time, but that doesn't eliminate the tax problem. The only way to avoid lump sum taxes is by a direct rollover from the original IRA to IRAs for each individual heir.

 

[davew128]

Of course any answer regarding this is contingent upon the custodian ALLOWING any of it: many do not.

 

[anteater]

Of course any answer regarding this is contingent upon the custodian ALLOWING any of it: many do not.

Dave - I'm not certain which part of this you are referring to. Making a trust the beneficiary?

If that is what you meant, I am surprised by your "many do not" statement. Actually, I have not run into any custodians that would not allow a trust to be designated as the beneficiary. I tossed in my parenthetical "check with the custodian" as what I considered to be a highly improbable "just in case."

 

[davew128]

Dave - I'm not certain which part of this you are referring to. Making a trust the beneficiary?

If that is what you meant, I am surprised by your "many do not" statement. Actually, I have not run into any custodians that would not allow a trust to be designated as the beneficiary.

I won't give names *cough*Vanguard*cough* but there are custodians that are EXTREMELY stringent on the flexibility of beneficiary designations, transfers, rollovers, inherited IRA's, etc.

 

[orangeGrower]

Thanks. It sounds like my choices are keep it simple, pay taxes, and have some control, or avoid taxes and penalties by making things more complex (trusts) or giving up control.

 

[anteater]

Thanks. It sounds like my choices are keep it simple, pay taxes, and have some control, or avoid taxes and penalties by making things more complex (trusts) or giving up control.

I don't know how you came to that conclusion regarding paying or not paying taxes. These are the basics about an IRA when you pass away: (I am assuming that this is not a Roth IRA and, if a traditional IRA, all contributions were deductible when you made them)

1) Required minimum distributions from the IRA will have to be made annually no matter who the beneficiary is.

2) Those distributions will be subject to income tax no matter who the beneficiary is.

3) Those distributions will not be subject to any tax penalties.

4) How much the required minimum distributions will be are determined by a number of factors: who the beneficiary(ies) is/are, his/her/their age, whether you reached the required beginning date (which requires you to begin taking distributions), etc. A bit much to lay out on a forum, but there are many internet sources that do so.

Therefore, the question is really whether you want to: 1) let the 2 heirs you mention inherit the IRA directly and trust that they will be prudent; or 2) set up a trust now or have your will create a testamentary trust and make the trust the beneficiary, with instructions to the trustee on how the IRA distributions are to be taken and then distributed to the trust's beneficiary(ies).

As I said in the prior post, if you are talking about a significant amount, it is worth it to consult with an estate planning professional.

 

[LdiJ]

I don't know how you came to that conclusion regarding paying or not paying taxes. These are the basics about an IRA when you pass away: (I am assuming that this is not a Roth IRA and, if a traditional IRA, all contributions were deductible when you made them)

1) Required minimum distributions from the IRA will have to be made annually no matter who the beneficiary is.

2) Those distributions will be subject to income tax no matter who the beneficiary is.

3) Those distributions will not be subject to any tax penalties.

4) How much the required minimum distributions will be are determined by a number of factors: who the beneficiary(ies) is/are, his/her/their age, whether you reached the required beginning date (which requires you to begin taking distributions), etc. A bit much to lay out on a forum, but there are many internet sources that do so.

Therefore, the question is really whether you want to: 1) let the 2 heirs you mention inherit the IRA directly and trust that they will be prudent; or 2) set up a trust now or have your will create a testamentary trust and make the trust the beneficiary, with instructions to the trustee on how the IRA distributions are to be taken and then distributed to the trust's beneficiary(ies).

As I said in the prior post, if you are talking about a significant amount, it is worth it to consult with an estate planning professional.

You have left out a MAJOR element...and that is the tax element...and the OP didn't appear to understand what I was saying either. THERE will be tax issues if the heirs cannot do trustee to trustee rollevers into an IRA of their own.

However, I will give the OP a suggestion that is quite complicated, but may solve his problems regarding the heirs that he believes will be responsible vs the heirs that he does not believe will be responsible.

If there are (for example) 4 heirs.

IRA beneficiaries can be as follows: (trusted ones)

John Doe
Jane Doe

As named beneficiaries both of them can do trustee to trustee rollovers into an IRA of their own and minimize tax consequences.


For the other two heirs: (the ones that cannot be trusted with money)

Trust set up for the benefit of Jim Doe.
Trust set up for the benefit of Emily Doe.

Its complicated as heck but it may actually accomplish what the OP wants to accomplish.

 

[anteater]

I was simplifying, using the assumption that the desired end beneficiaries of the IRA were the two potentially profligate heirs.

But, here's where I have a problem with what you are saying. And, I don't know if it is just semantics or not.

THERE will be tax issues if the heirs cannot do trustee to trustee rollevers into an IRA of their own.

1) There is no requirement that there be a trustee to trustee rollover. I am assuming that you are using the term "trustee" to mean the financial institution that holds the IRA assets.

2) When you say "an IRA of their own," be careful. I take "IRA of their own" to mean, following your naming example, "The IRA of Jane Doe." Unless the beneficiary is a surviving spouse, such a rollover would be considered as a complete distribution of the OP's IRA. For non-spouse beneficiaries, the IRA has to remain an inherited IRA.

As my own example, I will keep it simple. Harry orangeGrower has only one intended beneficiary for the IRA - his son, Joe orangeGrower - who he does not trust to not just take the whole thing and have a wild week in Vegas. So, Harry orangeGrower wants to enable his brother, Dave orangeGrower, to control the distributions from the IRA.

1) Harry creates a revocable living trust now or directs in his will that a testamentary trust be created with Dave as the trustee and Joe as the trust's beneficiary. (And includes enough direction for Dave in the trust, or in the will establishing the trust, that Joe hoepfully won't be badgering Dave continuously.)

2) Harry designates the trust to be the beneficiary with enough language that there is no confusion and that the IRA custodian will accept. Such as, "Dave orangeGrower, trustee of The Harry orangeGrower trust."

3) When Harry passes away, Dave has the IRA re-titled as an inherited IRA. For example, "The Harry orangeGrower (deceased) IRA, for the benefit of Dave orangeGrower, trustee of The Harry orangeGrower trust."

Of course, if there is more than one intended beneficiary and multiple trusts, the paperwork multiplies.

And the one thing not mentioned if intending to make a trust the beneficiary is to be certain that the trust contains the appropriate language so that the trust can stretch the IRA distributions as long as possible. Another reason why this is a "don't try this at home" project.

 

[orangeGrower]

Thanks. I have understood your suggestions and they make sense, but they are too complex for me and my heirs. I want the estate to end cleanly and simply. Ending up with a couple of trusts to manage long term is not acceptable. I can't explain the whole family situation in a few words, but my will and estate are going to be guided by the KISS principle.

What do you think of this? The four trustworthy heirs split the IRA by creating IRA's and taking a rollover. The two problem heirs get equivalent amounts of non-tax deferred money and the will states the money shall be used to buy them lifetime annuities.

 

[anteater]

What do you think of this? The four trustworthy heirs split the IRA by creating IRA's and taking a rollover. The two problem heirs get equivalent amounts of non-tax deferred money and the will states the money shall be used to buy them lifetime annuities.

That'll work. Although... You may have to keep on top of the proportions of your deferred to non-deferred assets so that you don't unintentionally skunk some of the heirs.

My only quibble is when you say "... and taking a rollover." As I was saying to LdiJ, there is no requirement for a rollover although the beneficiaries are free to do so. I am sure that your IRA custodian will be more than happy to have the assets remain with them.

The custodian will split the IRA into 4 inherited IRA's, properly titled as such. Then the beneficiaries can choose to keep the inherited IRA there or transfer to a properly titled inherited IRA at another custodian.