By Sarah Brenner, JD
Director of Retirement Education
While naming a spouse directly as the IRA beneficiary has many advantages and is a popular choice, it is not always the correct planning strategy. In some cases, another beneficiary may be better such as trust.
Here are five situations where it may be better NOT to name the spouse directly as the IRA beneficiary.
- Sufficient Assets. If a spouse already has sufficient assets, the IRA owner may want the money to go to other beneficiaries like children or a charity.
- Vulnerable Beneficiaries. There is no shortage of con artists and scammers looking to take advantage of vulnerable or naïve widows with large inheritances.
To protect these individuals, naming a trust as the IRA beneficiary can be extremely useful for limiting access and warding off those with malicious intent.
- Remarriage Concerns. A spouse, named as the beneficiary, has control over the inherited IRA assets and can choose how to manage them, including withdrawing funds or rolling them over.
However, this also means they are not obligated to follow any specific instructions from the original owner regarding the use of the funds. She can also choose who to name as the beneficiary – and that could be a future husband. Using a trust can be a viable option for spouses who want to exercise control from the grave.
- Blended Families. In second marriage situations, an IRA owner may want to provide for a spouse and at the same time ensure that children from a prior marriage ultimately will inherit the IRA funds. Rather than naming the spouse directly, an IRA owner may use a qualified terminal interest property (QTIP) trust.
However, QTIP trusts are complex and since the rules for inherited IRAs are also complicated a better strategy may be to split the IRA during the IRA owner’s lifetime. One IRA can be set up for the spouse and another for the children.
- Special Needs Beneficiaries. For spouses with special needs, a trust is essential to manage money and to protect government benefits when IRA funds are inherited.
If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.
https://irahelp.com/5-times-when-you-should-not-name-your-spouse-as-beneficiary/