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Who Should Be The Beneficiary Of Your IRA-

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Who Should Be The Beneficiary Of Your IRA- Powered By Docstoc
					                                      Presented by Daniel Toriola


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                               Who Should Be The Beneficiary Of Your IRA?
                                        By Robert D. Cavanaugh, CLU



   You have a number of choices when it comes to selecting a beneficiary (or beneficiaries) for your
IRA. Some are appropriate. Some are mistakes and can lead to delays and expenses in getting the
funds to your desired recipients. Some may even exclude some of your desired beneficiaries. In
addition, some elections are for estate planning purposes. Let's take a look at your options.

No Beneficiary

Not recommended. This mandates your IRA be distributed according to your will, if you have one. If
you don't, each state has "intestate" rules that divide your estate up in ways you wouldn't ever want.

An IRA with no beneficiary must be distributed within five years. By contrast, a named beneficiary can
spread the distribution out over the balance of their life expectancy.

Your Estate

Naming your estate as the beneficiary is the same as not naming one. The rules require a "named"
beneficiary. Now your IRA goes through the probate process. This costs money, takes time and
subjects your IRA to your creditors.

Why should you pay money to be represented by an attorney and have a judge in some probate court
decide whom your beneficiary will be? Why should your beneficiaries have to wait around for your
estate to be closed? What if your will is challenged? What if you have a big estate with estate taxes
due and the IRS is questioning the valuation of your business? I have seen estates open for as long as
ten years as the debate goes back and forth between your attorney and the IRS. The worst case I can
think of is your IRA completely eaten up by legal fees inasmuch it may be the only liquid asset.

Your Spouse

This is the most common designation and makes the most sense for a number of reasons.

If the spouse is the sole beneficiary, he or she can elect to treat the IRA as his or her own. This opens
up the possibility of delaying the start of the required minimum distributions (RMDs). This could be the
spouse's age 70 1/2, or for a Roth IRA, all the way to the death of the spouse. It also allows further



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                                 Presented by Daniel Toriola


"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 estate planning 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



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                                Presented by Daniel Toriola


http://theestatepreservationadvisor.com/freevideo.htm




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                                  Presented by Daniel Toriola


             IRA Distribution Rules At Death: Critical Knowledge For Good Decisions
                                    By Robert D. Cavanaugh, CLU



The distribution rules required at the death of an IRA owner depend on several things:

1. Did the IRA owner die before or after the “required beginning date”?

2. Who is the beneficiary?

In order to carry out the wishes of the IRA owner, evaluating both practical and estate planning
implications of various decisions during the IRA owner's life is essential. Important choices occur when
the IRA owner makes his beneficiary election and, if married, by the spouse after the death of the IRA
owner.

If you do not know the rules as they pertain to your choices, you are shooting in the dark. The wrong
decision can cost money and likely cause the distribution of your IRA to be different than you would
want.

Let’s make sure you know the rules of the game.

The first element is the required beginning date. For traditional IRAs, SEPs, SIMPLEs, this is Aril 1st of
the year after turning 70 1/2. This rule does not apply to Roth IRAs, which have rules of their own.

There are several broad categories of beneficiaries:

1. The spouse.

2. A non-spouse beneficiary.

3. No beneficiary.

Let's take each of these beneficiary elections and see how distributions are treated, depending on
whether the IRA owner dies before or after the required beginning date.

The Spouse as Beneficiary

If the spouse is the only beneficiary, he or she can make an election that has a bearing on when the
distributions must begin. The election is to treat the owner's IRA as if it were their own.

Heads up: This election choice is unavailable if a trust is the beneficiary of the IRA, even if the spouse
is the only beneficiary of the trust. A rollover may circumvent this problem.

If the IRA owner dies before the required beginning date, the spouse is the only beneficiary and the
election made, the required distributions don't have to begin until the IRA owner would have turned 70
1/2. The spouse would probably elect to apply this rule if the IRA owner was younger.

If the spouse elects not to be treated as the owner, the required minimum distributions (RMD) start



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                                  Presented by Daniel Toriola


right away and are based on the remaining life expectancy of the spouse. When the spouse dies, the
distributions continue using the remaining life expectancy of the spouse.

If the IRA owner dies after the required distribution date and the spouse does not make the election,
the distribution must be made over the life expectancy of the spouse; however, the life expectancy of
the IRA owner can be used any year it is greater. Taking the attained age of the IRA owner at death
and looking in a table determines the life expectancy. Then each year you subtract one. The point here
is that the spouse needs to make a comparison every year to obtain the longest pay out.

The “takeaway” from this is that knowledge allows for good decisions. The best choice will depend on
how old the IRA owner is when they die, the age of the spouse, health status and whether or not there
are children or grandchildren to provide for in a distribution.

Non-Spouse Beneficiary

Distributions are required over the remaining life expectancy of the beneficiary if the IRA owner dies
before the required beginning date. If there is more than one beneficiary, the oldest is used.

Heads up: Let's say the IRA owner is a widow age 80. She names her sister, age 82, and her children,
ages 55, 58 and 60 as beneficiaries. Her desire to help her sister causes the IRA to be distributed over
the remaining life expectancy of an 82 year old—probably much quicker than desired.

If the IRA owner dies after the required beginning date, the distributions must be made over the longer
of the remaining life expectancies of the owner or beneficiary.

No Beneficiary

If the IRA owner dies before the required beginning date, the entire IRA account must be paid out over
five years.

If death occurs after the required distribution date, distributions simply continue over the remaining life
expectancy of the IRA owner.

I think you can see there are a number of scenarios possible. When you combine this with the
complexities of the IRA distribution rules, it makes good sense to sit down with your financial planner,
tax attorney and accountant and make sure your IRA, SEP or SIMPLE IRA is coordinated with your
estate plan and the most probable distribution pattern coincides with your desires.

Robert D. Cavanaugh, CLU is a 36 year financial and estate planning 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
http://theestatepreservationadvisor.com/freevideo.htm




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                                Presented by Daniel Toriola




Related eBooks:

IRA Distribution Rules At Death: Critical Knowledge For Good Decisions
Completing a Deal on your IRA, Part One
Which IRA Is Best For You?
Did You Know You Can Invest Your Roth IRA Into Real Estate, Business, And More?
How to Calculate Your Minimum Required Distribution If You Own an IRA

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