When you pass away any funds that are left in your IRA will pass to your chosen beneficiary. In most cases, there is a good chance funds will be left to be inherited.
Directly to Heir
Passing funds directly to an heir creates three potential problems: if your heir withdraws all at once, he or she will owe income taxes on the entire account, your heir may spend the funds too quickly, or those funds may be taken to satisfy a creditor judgment, lawsuit or for a divorce settlement.
Special IRA Trust
Instead of passing IRA funds directly to an heir, you can house your IRA in a Special IRA Trust. This Trust is an Irrevocable Trust designed specifically for your IRA. There are many benefits to using an IRA Trust. Such a Trust offers asset protection, inheritance protection and a controlled disbursement of funds.
During your life, your IRA will most likely already be protected from your creditors and lawsuits. After your death, however, it will not be safe from your heir’s debts unless it is within an Irrevocable Trust of your IRA Trust. This can also protect funds from a beneficiary’s divorcing spouse.
If you are in a second marriage and you name your spouse as the beneficiary of your IRA, you may inadvertently disinherit your children. This is because your spouse is not required to pass those funds onto your offspring. If, however, you use an IRA Trust, your children’s inheritance will be protected.
If you are worried a beneficiary may spend funds too quickly if an IRA is received outright, a Trust may provide a steady income throughout your heir’s life. You can even use an IRA Trust to create Dynasty Trusts and allow for funds to continue into the lifetime of your beneficiary’s heirs.