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Individual Retirement Account (“IRA”) Defined

by Beth Flowers, Associate

When a person dies owning an Individual Retirement Account (“IRA”), the first step in the administration of the IRA is to determine who is named as beneficiary. The IRA owner’s choice of beneficiary will guide the distribution of the IRA at the IRA owner’s death and in turn, the timing of the payout of the IRA. If the beneficiary is a “designated beneficiary”, as defined by the Internal Revenue Regulations, the payout of the IRA can be stretched out over the beneficiary’s life expectancy. However, if the named beneficiary is not a “designated beneficiary”, the IRA will be required to be paid out within five (5) years of the IRA owner’s death.

A “designated beneficiary” is defined as an individual. A charity is not a “designated beneficiary”. In limited circumstance, a trust may be considered a “designated beneficiary” but the trust must meet specific requirements. A trust will be considered a “designated beneficiary” if the following requirements are met:

  1. The trust must be valid under state law;
  2. The trust must be irrevocable or will be become irrevocable on the death of the IRA owner;
  3. The beneficiaries of the trust must be identifiable; and
  4. A copy of the trust must be provided to the IRA administrator.

When a trust is named that qualifies as a “designated beneficiary”, the life expectancy of the oldest trust beneficiary would be used to calculate the required minimum distribution.

In certain circumstances, an IRA can be divided into separate accounts, one for each designated beneficiary in order to allow each beneficiary to take advantage of their own individual life expectancy. However, in order to take advantage of multiple life expectancies, the division of separate accounts must occur either before the IRA owner’s death or in the governing beneficiary designation document.

Typically, it is prudent to ensure that the IRA owner has a “designated beneficiary” named as beneficiary of an IRA. In some circumstance, the IRA owner has good reasons not to name an individual as beneficiary but the IRA owner must then be aware of the impact if a “designated beneficiary” is not named.

Beth Flowers is an attorney in the MM&R Edwardsville office who focuses her practice in estate planning, real estate law and business law.

Professional Services Disclaimer: Please note that the information presented here is as an educational service, and while it contains information about legal issues, it is not legal advice. No warranty is made regarding the applicability of the information presented to a particular client situation, and the information set forth is not a substitute for original legal research, analysis and drafting for a particular client situation.

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