In
most situations, you can leave your Roth IRA to anyone you please simply by
designating them as beneficiary. While it is perfectly legal to leave
retirement accounts to a minor, doing so can create some complications.
IRAs aren't just retirement
tools, they are also significant tools for estate planning. This is especially
true when it comes to Roth IRAs.
One specific application for
Roth IRAs is in the context of inheritance planning for grandchildren. Unlike
“regular IRAs,” there will be no future “income taxation” on withdrawals from
Roth IRAs. MarketWatch recently
explored this issue in a Q&A titled “How to leave your Roth IRA to a minor.”
Is it possible to leave a Roth
IRA to grandchildren for educational purposes or, failing that, to a trust for
their benefit? The short answer: yes. The Roth IRA (or other IRA) can be left
as part of the inheritance simply by naming one or more individuals as the
beneficiary or beneficiaries under the plan. In addition, you can name a trust
as a beneficiary, thereby allowing a single IRA to either work overtime for a
host of beneficiaries or to more carefully manage it.
Of course there is a long answer
to this question, too. Naming a minor as a direct beneficiary to an account
will require a legal guardian, which is a court-appointed role. Problem: the
legal guardian appointed may not be the person you would have selected.
Moreover, the IRA will not be skirting the court system as you may have
intended by passing free of the courthouse.
Arguably, naming the trust as
beneficiary does require the expense and thoughtfulness of establishing a
trust, but the benefits typically far exceed getting caught in the legal red
tape of the probate court.
Essentially, IRAs are unique
assets and giving to minors always involves a bit of a challenge in and of
itself. However, since IRAs are some of the most commonly owned assets, it
makes good sense to plan for their efficient administration after you are gone.
So, how does your Roth IRA (or
other IRA) currently fit into your estate plan?
For more information and articles on
estate planning and elder law topics, please visit our website
and sign up for our free monthly e-newsletter. You can also friend
our law practice's Facebook page (R Christine Brown).
Reference: MarketWatch
(September 20, 2013) “How to leave your Roth IRA to a minor”