Planning for IRA assets is complex. There are overlapping income and estate tax issues regarding the beneficiary designations and passing IRA assets upon death. One important objective often is to allow the children to "stretch" the IRA assets over a child's lifetime. An IRA stretch allows the child to take a required minimum distribution, which is tied into the child's life expectancy, but any asset appreciation above the required minimum distribution grows income tax free, providing a substantial retirement asset for the child.
However, there are complications. Assume that Frank, the father, wants his IRA to be available for his wife, Mary, if she survives him. Only at Mary’s death would the children inherit the IRA. Thus, it would be natural to leave the IRA to Mary. Mary could then name the children as her beneficiaries upon her death, allowing the children to stretch the IRA as described above. But what if Mary is a second spouse? Perhaps Mary would choose to rollover Frank's IRA into her own IRA, and then name her own children as beneficiaries, not Frank's children.
Frank could name a Trust for Mary as his IRA beneficiary. But if Frank names a Trust, with Mary as the beneficiary, Frank's children are then precluded from stretching the IRA over their lifetimes upon Mary’s death. Thus, although Frank obtains the control advantages of naming a Trust for Mary as his IRA beneficiary, it comes at a price for his children. If IRA assets remain upon Mary’s death, they will be distributed to Frank's children using Mary’s remaining life expectancy. On the other hand, if Frank trusted Mary to carry out his wishes and forgoes a Trust, Mary could elect the spousal rollover and then the IRA assets in Mary’s name could pass to the children over the children’s lifetimes.
This is just one example of complications arising from IRA planning.
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