Planning for the treatment of your IRA at your death should include more than filling out the beneficiary form. You should consider ways to leverage your IRA account to even greater wealth by the way you pass it to your spouse or heirs. You can keep more money in the hands of your heirs and out of the hands of the IRS with proper planning.

It is critical to understand that your IRA will pass to your heirs differently than other assets. A common mistake is to believe that your IRA will be controlled by your will or trust. That is not necessarily the case. Your IRA will pass to whomever you have named on your beneficiary designation form on file with the IRA administrator regardless of what your will or trust says. The contract you have with the IRA administrator will override your will or trust.

The same is true for all property that passes by beneficiary designations. Bank accounts, life insurance, annuities, and retirement accounts (such as 401(k)s and IRAs) are common assets that pass outside your will or trust as you have instructed on your beneficiary designation form. If these types of assets represent a large portion of your estate, then your beneficiary forms become a critical part of your estate plan.

The tax laws generally have three types of beneficiaries with different tax treatments: your spouse, non-spouse individuals, and entities (such as certain trusts, your estate, businesses and charities). Spouses receive the best tax treatment with the most flexibility in dealing with your IRA. Non-spouse individuals can also have great flexibility if they are properly designated as your beneficiary. Often the spouse and non-spouse individuals can allow your IRA to continue compounding on a tax deferred basis with proper planning.

A trust can also be named as the beneficiary of your IRA, but doing so has tax consequences that should be considered as part of your plan. Sometimes a trust is the proper beneficiary because you have minor children, a disabled or dependent child, or for some other reason there is a need for someone else to manage a person’s portion of the IRA. A trust may also give direction about how the funds should be used after your death.

A “stretch IRA” describes a named beneficiary’s ability to spread required distributions over the life expectancy of the beneficiary. The only requirement is that an individual beneficiary is named as a designated beneficiary on the IRA. This can also be accomplished using trusts if done properly on the designation beneficiary form. This will allow your beneficiary to leave the money in the IRA longer, and achieve continued growth on a tax-deferred basis.

There are other aspects that should be considered when preparing your will, trust, and other estate planning documents. The implications are too important to leave to chance.