Question: I plan on leaving my Individual Retirement Account to my children. Is there anything that I need to do with my estate plan to make sure that this is done right?

Answer: Your question concerns the area of “inherited IRAs” and the many traps that an unwary beneficiary of an IRA can fall into. Assuming that your children are adults, your best bet will be designating them as beneficiaries on the paperwork that remains with your IRA custodian (e.g. Fidelity, Schwab, etc.). It is frequently a good strategy to ensure that each child will inherit his or her own portion of your IRA by designating them certain percentages. In this way, each child can withdraw the IRA based on each child’s life expectancy.

Generally speaking, most people will not need to deal with IRA assets in their trust or estate. It could be a mistake to name your trust as a beneficiary of the IRA because under some circumstances it may cause all the deferred income in the IRA to be taxed in one year pushing the beneficiary into a higher tax bracket. Your children may lose significant tax savings. Indeed, there are some situations (e.g. minor children or spendthrifts) where it may be appropriate to name a trust as a beneficiary of an IRA, but this should only be done under the advice of a professional.

You should not be greatly concerned with the IRA inheritance plan that you create for your children, which should be as simple as naming them on a form. Instead, your concern should be on how your children, after your death, may mess it up. This isn’t any slight on your children. Even the most well educated and conscientious children can trip when it comes to the world of inherited IRAs. But if they navigate it well, that hard-earned retirement money could maintain years of tax-free savings and asset growth for them and possibly future generations.

The cornerstone of the IRA is its tax-deferred status. Over the years, you have contributed untaxed dollars to this account, and the untaxed money has (at least prior to 2016) accumulated gains. As the money is withdrawn, it is taxed as regular income. The strategy is to keep as much money inside the protected account for as long as possible. The same goes for your children as heirs.

Your children should want to keep the money safe from taxes for as long as possible, but doing so will require careful attention to detail on their part. Children must act properly in “retitling” the IRA account as an inherited IRA. This can be as simple as renaming the account from “Dad IRA” to “Dad IRA (deceased Jan. 10, 2016) for the benefit of (or “FBO”) Daughter, Beneficiary.” Your children need to understand that this process doesn’t automatically happen, nor is it well explained by most banks and other custodians.

After the death of a parent, many children will be in the process of gathering and moving the bank and brokerage accounts of a deceased parent. In the wake of grief and other matters, a child may inadvertently withdraw the retirement account in order to consolidate the money in a local bank more convenient to the child – or perhaps believe that he or she has 60 days to re-open a new IRA account. Sometimes even the banks will tell children they can withdraw the IRA. The withdrawal of the money is a final decision that will result in the entire sum being taxed in one year – the IRS will not give any mulligans!

If a child wants to move the IRA to a different financial institution, an inherited IRA must be transferred by a “trustee-to-trustee” transfer. The funds can never go in the hands of the beneficiary. The best advice you might give is to tell children to seek the advice of a professional before making any moves with respect to the IRA.

Even if your child follows all the rules, the protection of an inherited IRA isn’t without limits. Although the inherited IRA may protect your child from certain taxes on the IRA, the assets will not be protected from bankruptcy the way regular retirement assets would be. If you are concerned about a child’s creditors, this may be an instance when it is advisable to place the IRA assets into a trust, but again that should only be done under an attorney’s direction.

All in all, you worked hard for your IRA – don’t let your kids mess it up.

Preston Morgan is a partner at Kopper, Morgan & Dietrich, a Davis law firm providing family law, estate planning and trust litigation representation. His column is published every other week in the Davis Enterprise. To pose a question to Preston Morgan, contact him at

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