Don’t Name Your Estate as Your IRA Beneficiary
It may sound like it makes sense, and it might be easier than picking a person (or two) to name, however there are some serious downsides to naming your estate as the beneficiary for your IRA.


I recently came across an IRA beneficiary document, as I sometimes do, that names the estate as the beneficiary. While there can be some valid reasons for this, 95% of the time this is a really bad idea.
Sadly, most of the time I see the estate named as a beneficiary it is because of a lack of knowledge, or it is done in haste. If there is any question about who should get the money, the estate is often named with the person thinking, “I’ll fix it later.” The problem is “later” is usually too late, because most people never review their beneficiary forms.
The SECURE Act has eliminated the “stretch” IRA for most beneficiaries and replaced it with a complicated set of rules for distributions. The stretch used to allow you to take out distributions over your life expectancy based on an IRS table. For most beneficiaries after the SECURE Act, the new “10-year rule” will apply. This means that most beneficiaries will have to take the funds out of the IRA by the end of the 10th year (Dec. 31 of the 10th year following the year of death). The only people who can still stretch out IRA distributions over their lifetimes include:

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
- Surviving spouses
- Disabled individuals who meet a very strict definition of disability.
- Chronically ill individuals.
- Minor children. Only until the age of majority and then the 10-year rule will apply.
- Individuals within 10 years of age of the original owner.
A Major Problem with Naming Your Estate as the Beneficiary
So, if most people are going to use the 10-year rule, then why can’t you just name your estate as your beneficiary? For starters, estates cannot use the 10-year rule. They are required to distribute the funds out under a five-year rule. This can have several unwanted consequences including:
- Higher taxes. The shorter the timeline, the more you take out each year, the higher the potential for paying more in taxes.
- The higher payments can lead to higher Medicare charges (IRMMA).
- Potential for making Social Security payments subject to more tax.
- Creditor invasion. Assets left directly to a named beneficiary have good to great (depending on your state) protection against the claims of creditors. Assets in your estate do not.
- Higher estate administration costs. Probate fees, legal fees, etc. can also increase when the estate is named as the beneficiary.
- Increased potential for a “challenge” from a disgruntled heir. Challenges to a will could be more likely to be successful than a direct named beneficiary.
I understand that naming your estate can be the “path of least resistance,” but as you can see, the potential consequences far outweigh the time savings.
What to Do Instead
Take time to think through your beneficiaries and list them on your forms accordingly. The most important thing is to actually complete the beneficiary form in the first place. Then review it as needed. If you can’t find it, fill out a new form. It is a short and easy form to complete and not worth taking the risk of assuming that it is probably OK.
Review all of your beneficiary forms regularly just in case something in your situation changes. In addition, if you have questions about your beneficiaries or have a more complicated situation and aren’t sure who to name, you should talk to your financial adviser and consult with an estate planning attorney.
Disclaimer
Securities offered through Kestra Investment Services LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services or Kestra Advisory Services. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney or tax adviser with regard to your individual situation. To view form CRS visit https://bit.ly/KF-Disclosures.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
T. Eric Reich, President of Reich Asset Management, LLC, is a Certified Financial Planner™ professional, holds his Certified Investment Management Analyst certification, and holds Chartered Life Underwriter® and Chartered Financial Consultant® designations.
-
Stock Market Today: It's Going to Stay Choppy for Stocks
Auto-focus can show us a lot about uncertainty on the ground and in the stock market.
By David Dittman Published
-
Costco’s 4.5-Pound Tiramisu Cheesecake Might Be Your New Favorite Dessert
If you haven’t visited your local Costco bakery to check out the Kirkland Signature Tiramisu Cheesecake, you'd better get there early, they are flying off the shelves.
By Kathryn Pomroy Published
-
Revocable Living Trusts: The Good, the Bad and the Ugly
People are conditioned to believe they should avoid probate at all costs, but when compared with living trusts, probate could be a smart choice for some folks.
By Charles A. Borek, JD, MBA, CPA Published
-
How to Plan for Retirement When Your Child Has Special Needs
When your child has special needs, your retirement plan should include a plan for when you'll no longer be able to care for them yourself. A five-step guide.
By Christopher M. Butterworth, ChSNC®, CRPS, CLU® Published
-
Tax Advantages of Oil and Gas Investments: What You Need to Know
Tax incentives allow for deductions and potential tax-free earnings — benefits accessible only to accredited investors in small producer projects.
By Daniel Goodwin Published
-
Charitable Contributions: Five Frequently Asked Questions
Make the most of your good intentions by understanding the ins and outs of charitable giving. A good starting point is knowing what's deductible and what isn't.
By Stephen B. Dunbar III, JD, CLU Published
-
Financial Leverage, Part Two: Don't Say We Didn't Warn You
A lesson in how highly leveraged investments can benefit the first movers and crush the next round of buyers.
By Stephen P. Harbeck Published
-
Taxes in Retirement: What ESOP Participants Need to Know
Most Employee Stock Ownership Plans (ESOP) participants transfer company stock to an IRA starting around age 55, so taxes on that money have been deferred.
By Peter Newman, CFA Published
-
Would You Benefit From Investing in Cryptocurrency?
Understanding the complexity of adding digital currency to your investments is critical, especially since drastic price changes can happen very quickly.
By Robert Cannon, MBA, CFF®, AIFA® Published
-
Why Company Stock May Be Riskier Than Employees Realize
Stock compensation has its perks, but employees must be realistic (and unemotional) about their investments' prospects. Sometimes strategic sales are smart.
By Michael Aloi, CFP® Published