Avoid Probate With A Roth IRA
Probate is the mechanism whereby estates are settled. When you die, the value of everything you own and everything you owe is added up, the debts subtracted from the assets, and the balance distributed to your heirs. If there is insufficient money to pay all the debts and taxes, your property is sold, generally at auction, to raise cash so that the final bills can be paid. The process is controlled by an estate executor, appointed by you in your will, or by the probate court if you don’t have a will.
Creditors can make a claim against your estate for money owed them, and if there is sufficient cash to pay all the creditors, then the debts will be paid. If there isn’t sufficient cash, the creditors will receive a partial payment or no payment at all.
A Roth IRA Protects Your Cash
Roth IRA funds are not included in a probate estate; beneficiaries can request a death benefit without going through the probate court and bypass the system. For a Roth owner who has a lot of assets in the IRA account and a lot of debt, this is a way to pass the account assets on to beneficiaries instead of creditors.
Of course, the one creditor that cannot be avoided is Uncle Sam: The IRS will collect any taxes owed.
Beneficiary Must Be Properly Designated
Passing the IRA money to your heirs is easy. Your account custodian will give you a beneficiary form to fill out. You don’t have to mention the IRA in your will or living trust, the form is all that is needed. On the form, be sure to designate an individual or legal entity as beneficiary; do not name the estate. If you name the estate, your creditors can access your money. It’s acceptable to name more than one individual as beneficiary; they will simply split the money.
When your account is set up this way, all your beneficiaries have to do to claim the money at the time of death is to present a certified copy of the death certificate. The funds will come to them in full, quickly and without probate.
Beneficiaries Choice
Avoiding probate and passing the IRA funds directly to your beneficiary allows your heirs to choose how your estate money will be spent. If they choose to pay your creditors in full, they may. They might also choose to fund a child’s education, buy a home, or start a business. The difference is the matter of choice; if the funds went to probate, the choice of how the funds are spent goes to the execut
