When most people think about taking care of their heirs after they pass away, they think about drafting up a will, or perhaps naming beneficiaries in their life insurance policies. But there’s another way to pass down your assets to your heirs, and that’s to use your self-directed IRA as an estate planning tool.
Your Spouse as an Heir
The least burdensome and potentially most valuable situation is where you pass down your self-directed IRA to your spouse. A spousal heir can choose simply to roll your account assets into their own existing account, or they can leave your account intact and have the account ownership changed to their name. A spousal heir can also benefit from a new application of the rules on required minimum distributions.
With a traditional self-directed IRA, the account holder must begin taking distributions from their account each and every year, with the minimum distribution being based on their age and account value (Roth IRAs are not subject to these rules on required minimum distributions). But if spouse inherits your traditional self-directed IRA, then the rules can be calculated based upon their own life expectancy.
The situation is notably different for a non-spouse heir. A non-spouse heir is not permitted to roll over an inherited self-directed IRA into their own account. Rather, they can either: (a) take a distribution of all the assets in the account (and pay any taxes that may be due on that distribution, depending on whether the self-directed IRA was structured as a Roth or a traditional account); or (b) path that account characterized as an “inherited IRA,” which then requires that the heir begin taking required minimum distributions from the account based on their own life expectancy.
Note that there is no way for a non-spouse heir to keep the inherited assets in an IRA and let them grow on a tax-advantaged basis, so naming your spouse as your account beneficiary almost always maximizes the value of your account as compared to naming a non-spouse beneficiary.
Consider Planning With Their Perspective in Mind
Remember that when you’re looking to pass down your self-directed IRA to one or more of your heirs, you need to account for how they will be affected by inheriting your account. For example, non-spouse heirs need to begin drawing down on the assets of the inherited self-directed IRA, either all at once or using the calculations specified in the required minimum distribution rules.
If your self-directed IRA is comprised of illiquid investments such as real estate, this could potentially turn into a heavy administrative burden on a non-spouse heir. Even worse, if that heir is forced to liquidate those assets on unfavorable terms in order to meet the distribution requirements, you could be sacrificing significant value from your account.
It’s better to take a broad view of your entire estate, and choose to pass along the accounts and assets to those individuals that will receive the highest degree of benefit from them.
Quest Trust Company helps change people’s lives and financial future through self-directed IRA investment education. Quest Trust Company helps people invest in what they know best and build their financial future on their own terms.