IRA Beneficiary Planning — New York

Most people assume their will controls where their IRA goes at death. It does not. IRA assets pass by beneficiary designation — a form filed with the IRA custodian that supersedes the will entirely. If the beneficiary form names a deceased person, an ex-spouse, or is left blank, the assets may pass to your estate — triggering probate and potentially requiring full distribution within five years, with the entire amount taxable in that period. Keeping beneficiary designations current and correctly structured is the single most important estate planning action for IRA owners, and it is the first thing Doug reviews in any legacy planning engagement.

The SECURE Act of 2019 eliminated the stretch IRA for most non-spouse beneficiaries. Adult children who inherit a Traditional IRA must now distribute the entire balance within 10 years of the original owner's death. There are no required annual distributions within the 10-year period for beneficiaries whose original owner had not yet begun RMDs — but the account must be empty by the end of year 10. For beneficiaries in their peak earning years, this can mean taking large distributions at the highest marginal rates. The response is to convert pre-tax IRA assets to Roth during the original owner's lifetime, so beneficiaries inherit a tax-free account.

The SECURE Act created a category of Eligible Designated Beneficiaries (EDBs) who are exempt from the 10-year rule and can still stretch distributions over their life expectancy. EDBs include: surviving spouses, minor children of the original owner (until they reach the age of majority), disabled individuals, chronically ill individuals, and beneficiaries not more than 10 years younger than the original owner. Understanding which beneficiaries qualify as EDBs is important for clients who want to maximize the tax-deferral benefit for specific heirs.

Naming a trust as IRA beneficiary can provide control over distributions — useful for minor children, spendthrift beneficiaries, or blended family situations. However, trusts must be carefully drafted to qualify as a 'see-through' trust under IRS rules, or the IRA may be required to distribute within five years. Even a properly drafted see-through trust is subject to the 10-year rule for most beneficiaries under the SECURE Act. For most adult beneficiaries without special circumstances, naming them directly is simpler and allows the full 10-year distribution window. Doug identifies which approach fits your family situation and coordinates with your estate attorney on the trust drafting requirements.

For clients with both charitable intent and heirs, naming a charity as beneficiary of a pre-tax IRA — and leaving Roth or after-tax assets to family — is often the most tax-efficient distribution of the estate. The charity pays no income tax on the IRA distribution. The heirs receive tax-free Roth assets or after-tax assets with a stepped-up cost basis. This strategy effectively eliminates the embedded income tax liability in the pre-tax IRA while preserving the full value of the estate for both charitable and family beneficiaries.