Executive Summary:

• Beneficiary Forms Rule IRAs: If you have filled out a beneficiary form your IRA assets are distributed based on your beneficiary form, which bypasses the probate process entirely.
• Wills Cannot Override Beneficiary Forms: Nothing written in your will can change who inherits your IRA. Failing to align your will with your beneficiary forms can cause unintended distribution issues, especially if the IRA holds a major portion of your wealth.
• Default Custodian Rules: If you fail to name a beneficiary, the IRA custodian’s contract dictates where the assets go, which usually defaults to your estate.
• The SECURE Act Impact: The SECURE Act reduced tax deferral benefits for inherited IRAs. Leaving an IRA to your probate estate instead of directly to a named beneficiary minimizes these tax-deferral benefits.
• Spousal Rollovers: A spouse is often the ideal beneficiary because they can roll the assets into their own IRA and postpone Required Minimum Distributions (RMDs) until age 73 or 75, maximizing tax-deferred growth.
• Minor Children Benefits: Naming a minor child directly delays the strict 10-year payout rule. The 10-year window to empty the account does not start until they turn 21, allowing the money more time to grow tax-deferred.

Who will inherit my IRA? – If you have an IRA, you most likely have filled out a beneficiary form that dictates where those assets will go upon your death. And if this is the case, then your IRA assets will get distributed outside of the probate process. Nothing in your will can change that. So you need to keep this in mind when you are deciding the terms of your will. If you don’t, then you may unintentionally be distributing your estate very differently than you had thought. This is especially true if your IRA contains a significant proportion of your assets. [These beneficiary form issues also apply to other financial assets like checking and savings accounts, investment accounts, life insurance policies, etc.]

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If by chance you haven’t filled out a beneficiary form, then the wording in the contract you have with the IRA custodian will dictate where those assets will go. The terms of these contracts can be very different from custodian to custodian, but most of them say that the assets will pass to your estate.

You might be thinking this is OK, but depending on who the beneficiary is it actually may not be OK at all. The SECURE Act that was originally passed in 2019 and was updated in 2022 took away many of the tax deferral benefits of inheriting assets from someone’s IRA, but not all of them. For example, someone’s spouse or someone’s minor children can still take advantage of additional tax deferred benefits of inherited IRA assets. But if those assets pass through your will to your spouse or minor children, those tax deferred benefits do NOT still exist. This means that your spouse and/or minor children would have to start taking required minimum distributions (RMDs) sooner and thereby must pay taxes on those assets sooner.

Often the ideal beneficiary is a spouse, because a spouse can rollover their deceased spouse’s IRA into their own and postpone RMDs until they turn 73 or 75, depending on birth age, if they so choose. By that time the assets could potentially be worth a lot more.

But even if you were to leave these assets to your kids, that would be much better than leaving it to your probate estate. If it goes to your probate estate, then the tax deferral benefits get minimized. The beneficiary has to immediately start taking the assets out over a maximum of a 10 year period. But if your minor child inherits those assets directly, then at first the child must start taking RMDs, but that 10 year period where they must take everything out doesn’t start until they turn 21 years old. These additional years of deferring taxes and letting the assets grow can still make a huge difference in how much money the beneficiary will actually receive.

Who will inherit my IRA and how they inherit it are very important things to think about in your estate plan.