Do IRAs Override a Last Will & Testament?

By Terry White

The beneficiary form you complete when you open an IRA is like a “mini-will” for your retirement account. Because your IRA comes with its own built-in beneficiary, it doesn’t need to pass to beneficiaries through your will; it goes directly to the named beneficiary and bypasses the probate process. Failure to name or update a beneficiary can have severe financial consequences for those who eventually end up owning the IRA.

Name a Beneficiary

A standard part of any IRA account application is the “designated beneficiary form.” You should name a primary beneficiary – the person you want to have the IRA when you die. You should also supply at least one secondary beneficiary, in case the primary beneficiary predeceases you. This designated beneficiary form governs distribution of the IRA to your heirs regardless of any contrary language in your will.

Outdated or No Beneficiary

It’s important to read your IRA contract. If you don’t name a beneficiary or the beneficiary dies and there’s no alternate, the company that issued the IRA might determine the beneficiary. Usually, that means the surviving spouse inherits the IRA, or if there is none, the account goes to your estate. If your retirement account ends up as an estate asset, your will determines who will get the IRA proceeds. If you do not have a will, then state intestacy laws determine your heirs, with spouse, children, and parents first among consideration. The same rule applies if your beneficiary and alternate beneficiary predecease you and you fail to name replacement beneficiaries.

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Non-Probate Asset

If your IRA passes to your estate, it's distributed according to your will, but with heavy financial consequences for your beneficiaries. Suddenly a non-probate asset -- one that normally passes outside your will -- is subject to probate and your estate’s creditors. When the beneficiary is someone other than the surviving spouse of the deceased, federal law requires the distribution of the entire IRA balance within five years of the IRA owner's death, cutting short the time for the account to grow. None of these consequences occur if the IRA passes to a designated beneficiary named in the contract.

IRAs and Living Trusts

Think of a living trust as a substitute will. When you die, your trustee distributes your property as you desired, but usually without the cost and hassle of probate. A special kind of trust for retirement funds is the revocable IRA trust. With this type of trust, you name the trust as beneficiary of the IRA and upon your death, the IRA funds the trust and avoids immediate tax consequences. You can dictate the amounts and frequency of distributions, or distributions can be based on the life expectancy of the oldest beneficiary of the trust. Living trusts are way to delay the disbursement of IRA funds over many years to allow growth to continue. You can also use them to protect a special needs or spendthrift child, or prevent the public display of your finances that occurs in probate.

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Can a Revocable Trust Be the Beneficiary of a Personal Bank Account?


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How to Move an IRA to an Irrevocable Trust

Your irrevocable trust is a permanent agreement that describes how your trust assets are managed, identifies who receives the trust's contents and appoints someone to oversee the trust –– known as the "trustee". You can't directly transfer an IRA account to your trust during your lifetime, but you can name the irrevocable trust as the IRA's beneficiary when you die. In this way, the entire account balance that would normally pass to your beneficiaries as lump sum, and on which they would have to pay taxes, goes, instead, to the irrevocable trust. IRS rules allow the beneficiary to take minimal annual distributions from the trust. These distributions continue over the expected lifespan of the oldest beneficiary of your trust, thus lowering, and sometimes eliminating, taxes.

How to Transfer a Vanguard Account to a Living Trust

Transferring property to a living trust is an important step in setting up the trust. Investment accounts, such as those offered by Vanguard, allow an investor to list a beneficiary who will receive the proceeds of the account upon the account holder’s death. Problems arise, however, if the beneficiary dies before the account holder. It is for this reason that transferring these types of accounts to your trust is prudent financial planning.

How to Name a Trust as Successor Beneficiary of an Inherited IRA

When someone creates an Individual Retirement Account, she names a beneficiary to inherit whatever remains in the account at her death. Depending on the IRA plan document or the rules of the custodian, the IRA owner or the IRA owner's beneficiary may be able to name a successor beneficiary for any remaining account balance at the primary beneficiary's death. This can be an individual or individuals, the decedent's estate or a trust. One advantage to naming a trust as successor beneficiary is control over how and when distributed assets will be paid out to heirs. For example, if, as a primary beneficiary, you want your child to receive your undistributed IRA inheritance, but don't want her to have access to those funds until age 21, the IRA account will be distributed to the trust based on IRS distribution rules, however, the trust document will specify that the trustee should not distribute those funds to your child until she reaches age 21.

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