For clients with a significant portion of their assets in a retirement plan, assets that will most likely be rolled over into an IRA account, designating a beneficiary is an important part of estate planning.

             The beneficiary designation not only controls who receives the IRA assets at death, but also how quickly the assets may be distributed and when and to what degree the distribution will be taxed.

             The most popular beneficiary designations are:  1) Spouse; 2) Trust; 3) Descendants; and 4) Charity.  Below is a brief discussion of the ramifications of each choice.

 1.         Spouse – This is the most popular beneficiary designation and arguably the most flexible.  IRA assets may be left to a surviving spouse either outright or in the form of a QTIP trust.  Either way the IRA assets are not subject to estate tax since the assets qualify for the marital deduction.

• Outright:  If the IRA owner has sufficient assets to take advantage of the applicable exclusion amount (the amount one can pass to a non-spouse without paying estate tax - $1,000,000 for 2002 and 2003) without using IRA assets, and is willing to relinquish control of the IRA to the spouse after death, naming the spouse as outright beneficiary gives a very attractive tax result.

 The surviving spouse need not take distributions until the decedent would have reached age 70 ½ , or the Spouse may roll over the IRA to his or her own IRA account.  In that case, the surviving spouse need not begin withdrawals until he or she reaches age 70 ½.

• QTIP trust – an IRA owner who wants the IRA assets to qualify for the marital deduction for estate taxes but does not want to relinquish control of the IRA should consider naming a QTIP trust as beneficiary.

If this option sounds attractive to you, it should be discussed with your estate planner to ensure the trust terms dovetail with the IRA distribution and marital deduction requirements.

 2.         Revocable Trust – Clients may want to use IRA assets in whole or in part to take advantage of the applicable exclusion amount especially if the client does not have sufficient non-IRA assets to fully fund this amount.

            When the revocable trust is named as beneficiary and a fractional formula is used within the revocable trust to allocate estate assets between a marital share and a bypass trust, the applicable exclusion amount can be used.

             An alternative strategy is to name the spouse as primary beneficiary as discussed above and name the revocable trust as contingent beneficiary.  This allows the surviving spouse to then disclaim the optimal amount of assets to take advantage of the applicable exclusion amount.

3.         Descendants – Assets may be left to the IRA owner’s descendants outright or in the form of a trust.  Many clients name the revocable trust as beneficiary and then incorporate into the revocable trust provisions regarding the descendants.

             If the client intends to leave IRA assets to some descendants outright, and to others in trust, the IRA owner may designate as beneficiaries his or her surviving descendants, but provide that certain descendants’ shares be added to any trust created for such descendants under the client’s revocable trust.

 4.         Charity – This is a popular beneficiary designation for IRA owners who have charitable intent because an IRA can be left to a charity both income and estate tax free.