Choosing the right beneficiary for an IRA is an important decision to make for people in Minnesota. Individuals who have no family may want to name a charity as beneficiary. Many people choose their spouses. A spouse who inherits an IRA has the same rights as the original owner, but no other beneficiary will. Other beneficiaries must begin taking distributions, which may have tax implications.
In some cases, a spouse may not need the retirement account. Some people may want to name their children as beneficiaries. Another option is to name the spouse as a primary beneficiary and the children as contingent beneficiaries. This gives the spouse the option of allowing the IRA to go directly to the children. Naming children as beneficiary per stirpes ensures that if a child dies, his or her heirs will get the asset.
One reason to name grandchildren as beneficiaries instead of children is to keep the children from being placed in a higher tax bracket. It may be necessary to name the parents as custodians if the grandchildren are minors. People may also want to consider whether they are more concerned about taxes or about how distributions are made. Putting the IRA into a trust is an option if the latter is the case. The disadvantage is that a trust could trigger more taxes at an earlier date.
An attorney may be able to assist a person with making decisions about beneficiary designations, estate planning and probate. Some people may forget to include a beneficiary designation in their estate planning documents even though they may review and update a will or a trust. A common error with beneficiary designations is failing to revise it after a divorce. This can result in an IRA or other asset going to an ex-spouse or ending up in litigation.