1. Required Minimum Distributions. Beneficiaries of inherited IRAs must start taking Required Minimum Distributions the year after the original account owner dies. Minor beneficiaries are unable to legally manage the payments.
2. Trusts. Instead of the IRA passing directly to the minor, a trust benefiting the minor can be designated as beneficiary.* Without a trust, when a minor eventually reaches the age of 18 when they may access the inherited retirement account, they will have the freedom to use the money however they desire. IRA holders who designate a minor as a beneficiary may not take into account that the minor’s spending habits have not yet developed. What if the minor spends money frivolously when they mature? Trusts offer additional protection and prevent minors from mismanaging the accounts and withdrawing too much, too soon, wasting the opportunity for continued tax-deferred growth. Trusts allow the grantor to set forth specific terms under which trustees may benefit from the funds. To ensure the inheritance will not be wasted, provisions can be crafted addressing when and how to use the money. (Exclusively for tuition purposes, at a certain age, etc.) Appoint a guardian. Minors are not permitted control of retirement accounts until they reach the age of 18. A guardian of a minor’s property may not be necessary if assets are paid to a trust, but where that is not the case, a guardianship allows an adult to oversee distribution of the retirement account on the minor’s behalf. However, guardianship is expensive and time consuming, and all details of the inheritance become public record.
3. Never name an estate as a beneficiary of an IRA. The beneficiary should always be a trust. Stretching of distributions over a beneficiary’s lifetime is only available if an individual is named (not recommended because of lack of protection) or a properly designed trust is used (recommended as protection is offered).
*Greg Herman-Giddens of TrustCounsel will instruct a national teleconference “How to Draft IRA Trusts” on November 19, 2013 from 2PM-3:30PM EST. The presentation reviews important information specific to IRA trusts, a few of which include critical deadlines, creditor/divorce protections, and how to manage tax issues for beneficiaries. Continuing Legal Education Credit is available. Registration information at the link above.