Benefits

• Naming beneficiaries allows your heirs to take immediate control of their inherited assets. The IRA's ownership is not subject to a legal battle in probate court, nor is it vulnerable to creditor claims. However, IRAs that pass to the estate are subject to probate. Furthermore, designated beneficiaries may keep their inherited IRAs open for many years, thereby extending their tax shelter. IRAs that pass to an estate must be emptied within five years.
  
  

Designating Beneficiaries

• To name a designated IRA beneficiary, you must file documents directly with your IRA trustee, which usually has forms for just this purpose. On this form, you may also designate a contingent beneficiary to inherit the account should the first beneficiary pass away, either before or after your death. It's important that you designate your beneficiary with your trustee and not just in your will, as trustees are responsible for handing off your IRA to the right people or person. If there is any uncertainty about who should inherit your IRA, it will probably pass to your estate.
  
  

Function

• All nonspouse IRA beneficiaries have two options: they may either take what are called required minimum distributions (RMDs) beginning the year after the original IRA owner's death, or withdrawal an IRA's balance in a lump sum after five years. Beneficiaries who choose the former route can extend an IRA's tax shelter over their lifespan. The IRS calculates RMDs by dividing an IRA's worth by the owner's life expectancy. Should the first beneficiary die, a contingent beneficiary can continue taking RMDs over the remainder of the first beneficiary's expected lifespan.
  
  

Considerations

• If you designate your spouse as your sole beneficiary, she is unique among your possible heirs in that IRS rules allow her to treat the account as her own. She may continue contributing to it and delay indefinitely taking distributions if she has a Roth IRA, or until she turns 70 1/2 if she has a traditional IRA. She may also name her own beneficiaries and contingency beneficiaries. In this way, it may be possible for an IRA to benefit many loved ones.
  
  

Features

• If the original owner did not name a contingent beneficiary, the IRS has allowed IRA beneficiaries to name their own contingents. Contingents named by the first beneficiary would be allowed to take RMDs over the remainder of the first beneficiary's lifespan, as they would have had they been designated by the original owner.