One, a living human being must be named as an IRA beneficiary in order to stretch out required distributions—a client leaving the IRA to an organization or estate eliminates the possibility of heirs using a stretch IRA. The heir must be named as a beneficiary on the account’s beneficiary form.
“A lot of people use their estate as the beneficiary, but that’s a mistake,” said Brenner. “To get a stretch IRA, you need life expectancy. If you have clients that have named their estate as the IRA beneficiary, it’s not too late—they can change their beneficiary.”
Brenner pointed out that discussing account beneficiaries is an opportunity for advisors to engage with and add value for their clients. Life events like divorces, marriages, births, deaths and adoptions should trigger a review of beneficiary designations.
Naming a beneficiary also helps heirs avoid probate, claims and other legal obstacles.
An inherited IRA must also be properly titled so that it retains the original IRA owner’s name while also indicating it was inherited by the beneficiary.
“What will blow up a stretch is putting the IRA in the name of the beneficiary alone. It’s really important you get the titling right,” said Brenner.
There is no established format for the account title of a stretch IRA, said Brenner, but she did give an example: “John Smith IRA (deceased 11/27/18) F/B/O John Smith, Jr., Beneficiary.”
IRA beneficiaries must not take a full distribution from the account if they wish to take advantage of the stretch IRA strategy, said Brenner.
“A lot of times, people don’t know a lot about how IRAs work. They act first and then learn about it later,” she said. “That’s a problem. Once they take a distribution, that’s the end of the road. No rollovers are possible. It’s a mistake that can’t be fixed, and the non-spouse beneficiary gets hit with a big tax bill.”
However, missing an RMD will not jeopardize an heir’s ability to use the stretch IRA strategy, said Brenner. If an RMD is missed, the beneficiaries would still likely have to pay the 50 percent excise tax penalty on the distribution, but they can still calculate their RMDs using their own life expectancy.