How to Pass Along an IRA to Your Heirs

by Maggie Lourdes
Bankers can add a death beneficiary to an IRA.

Bankers can add a death beneficiary to an IRA.

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An individual retirement account is a savings tool that offers tax benefits to its owner. When an owner of an IRA dies, her heirs are entitled to its value. Different estate planning mechanisms exist for passing an IRA to a decedent's heirs. State laws govern estate planning and may vary slightly in different jurisdictions. Also, how an IRA passes on death raises important tax consequences which should be investigated and considered before making a final choice.

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Pay-on-Death Beneficiaries

A pay-on-death, or POD, beneficiary can be named on an IRA. This allows it to pass at the owner's death by simply presenting a death certificate to the financial institution where it is located. Naming a beneficiary avoids probate court. This saves a beneficiary time, court costs and potential legal fees. A representative at the bank or brokerage house where the IRA is located can easily facilitate the naming of a beneficiary to the account.

Passing Through Trusts

An IRA may also be titled in a trust which names beneficiaries after the trust maker's death. Any asset owned by a trust, including an IRA, bypasses probate court. A trust can lay out specific terms for payment. For instance, it can direct trust assets be paid to a beneficiary over time versus a lump sum. Larger IRAs can be set up to benefit many, future generations of a decedent.

Inheritance by Will

An IRA can also pass by a decedent's will. A will must be probated, which delays payment to the decedent's named heirs. It also can be costly since estate debts, legal fees and court costs must be paid from the decedent's estate before assets can be distributed to heirs. Passing an IRA through a will is wise if no trust or POD beneficiaries exist, in that it passes the IRA to a decedent's desired heirs.

Intestate Succession

An IRA can also pass according to state law. When the owner of an IRA dies with no will or other estate planning directions, it will pass by intestate succession. The spouse is generally first in line to inherit a decedent's estate. If the decedent also has children, state law may require they share the asset. If a decedent leaves no spouse or children, intestate succession defaults to her next closest relatives. If no relatives survive a decedent, an IRA is turned over to the state treasury.