(MoneyHippo.com) – One of the last things you might think about when setting up finances is preparing assets for those you leave behind. Choosing beneficiaries is an excellent first step in planning. Failing to pick a person or persons to receive your IRA may result in the estate becoming the beneficiary by default. Some individuals could even make the designation specifically on the forms, but making that choice might be a mistake.
Here are a few reasons not to list your estate as the inheritor of a traditional IRA retirement account.
- Taxes: Normally, a person who inherits this type of investment account can take distributions over their remaining life expectancy. When an estate receives an IRA, the government requires disbursements to happen as quickly as possible — sometimes over just five years. The shortened time frame will increase the tax burden and decrease the amount available for your family.
- Probate: Without picking an individual as an IRA heir and leaving it to the estate, the funds must go through probate court, delaying distribution to loved ones. That process will take time and money to accomplish. Additionally, the judge might not distribute the funds as you intended or could even order the executor to use the funds to pay outstanding creditors.
- Challenges: After you pass, people you had no intention of including in your final financial plan might clamor for your assets. Naming an estate as beneficiary instead of individuals leaves the inheritance more vulnerable to claims from a “disgruntled heir.”
Estate planning can be complex, so doing it correctly becomes critical. Consider talking to a professional about arranging your legacy in the best way possible.
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