IRA written on wooden blocks on top of change

Trumbull Estate Planning Lawyers on Reasons to Avoid Naming Your Estate as an IRA Beneficiary

  • By Steven Rubin
  • |
  • Posted January 24, 2023

Designating your estate as the beneficiary of your IRA might make sense to you. It's simpler than choosing one or several loved ones as beneficiaries. It can also prevent future arguments and lawsuits among your family since you’re not naming one person over another.

However, naming an estate as an IRA beneficiary is problematic and comes with a range of disadvantages. Typically, people designate their estate as the beneficiary because they don’t know any better or feel rushed to complete their estate plan. We provide estate planning services in Connecticut and beyond for those looking to plan for retirement.

IRA Distributions

Before January 1, 2020, the “stretch-out approach” allowed IRA distributions over an individual's lifetime based on a life expectancy table. However, the SECURE Act no longer permits beneficiaries to use the stretch-out approach. Instead, distributions depend on complicated regulations.

Most beneficiaries are subject to the ten-year rule under the SECURE Act. That means they must accept distribution of the IRA funds within ten years of the account holder’s death.

Only specific individuals can ignore the ten-year rule and stretch out IRA distributions. Those people include:

  • Surviving spouses
  • Chronically ill people
  • Disabled individuals
  • People within ten years of the account holder’s age
  • Minor children

Consequences of Choosing Your Estate as an IRA Beneficiary

You might not understand the problem with naming your estate as the beneficiary for your IRA. However, estates can’t follow the ten-year rule. They must distribute all funds within five years.

Emptying an IRA in only five years can have significant consequences, such as:

  • Creditor claims – Leaving your IRA to an individual protects them from claims by creditors. However, your estate doesn’t have protection and can be subject to lawsuits to pay off debts.
  • Higher taxation – Taking more money out of an IRA during a short timeframe will likely lead to higher taxes.
  • More administration costs – Designating an estate as the beneficiary of an IRA means higher legal fees, probate fees, and other expenses.
  • Medicare charges – Higher Medicare charges often result from higher IRA distributions.
  • Higher taxes on Social Security – Social Security payments are subject to higher taxes when an estate is the named beneficiary of an IRA.
  • Will contests – An angry or upset heir might be more willing to challenge the validity of the will if the IRA beneficiary is the estate.

How to Handle an IRA Beneficiary Designation

Instead of naming your estate as the beneficiary, consider other options. You should choose one or multiple individuals to transfer the account to when you die.

You must complete a beneficiary designation form. Otherwise, someone you don't want to receive the funds can end up with the account.

Besides filling out the necessary form, regularly updating it is crucial. You should make changes after significant life events. For example, picking someone else is necessary if your chosen beneficiary dies.

Contact Our Trumbull Estate Planning Lawyers

You can avoid making a costly mistake by carefully choosing someone to be the beneficiary of your IRA instead of your estate. Ensure your beneficiary designations stay up to date, so your asset goes to the right person.

Contact our Trumbull estate planning lawyers today if you want to learn more about designating a beneficiary for your IRA. We can help protect your assets and secure your family's financial future. To schedule a consultation, call 203-877-7511.

Contact our estate planning lawyers located in New Haven and Harford, Connecticut.