Who—or What—Can Inherit an IRA?
By Mike Rahn, CISP
For most who own a Traditional, Roth, SEP, or SIMPLE IRA, designating a beneficiary to inherit the balance that remains in the IRA after their death is likely be a matter of “who.” IRA beneficiaries are usually one or more persons that the IRA owner has named; most often the beneficiary is an immediate family member; typically a spouse, child, or both. Less frequently, the beneficiary is a decedent’s sibling, another relative, or a valued acquaintance.
But beneficiaries such as these are not the only options. Some IRA owners choose to leave their IRA to an entity instead of a person. In all cases, to name a beneficiary, whether a person or an entity, the IRA owner must comply with the financial organization’s rules for naming a beneficiary. In those cases where an IRA owner has failed to name a beneficiary, a provision in the IRA plan agreement will identify the default beneficiary.
What is a Nonperson Beneficiary?
While it may seem obvious, any IRA beneficiary that is not a “person”—not a human being—is considered a nonperson beneficiary. Notwithstanding the occasional news story of an eccentric’s bequest to a beloved pet, the most common nonperson beneficiaries are charitable organizations, trusts, and estates. The distribution rules that these entities must follow as IRA beneficiaries are similar in concept to the distribution rules for individuals, mainly specifying how rapidly an inherited IRA must be distributed. These rules are not identical, however, and may not be as flexible or favorable as the rules for a person who inherits an IRA.
Charities as Beneficiaries
According to an April 2025 AP-NORC article, 73 percent of the population made charitable contributions during the previous year. While cash donations are the way many Americans routinely make charitable contributions—and correspondingly receive tax deductions for them—estate planning is also part of the picture.
Many kinds of nonprofit organizations promote the inclusion of their mission in a potential donor’s estate planning, including naming the organization as a retirement account beneficiary. Organizations as diverse as the American Cancer Society and The Nature Conservancy do so. Unlike a person who inherits a pretax IRA—and will be taxed if their income is above the tax filing threshold—such charitable organizations are not taxed on these “donations” per se, if they comply with 501(c)(3) nonprofit rules.
Trusts as Beneficiaries
The reasons to name a trust as one’s IRA beneficiary can be complex. A primary reason is to restrict or control access to financial assets after one’s death. Potential beneficiaries who are young, or whose ability to responsibly manage finances is in question, may—by means of a trust—be provided benefits without being given unrestricted access.
A trust may also be named as an IRA beneficiary in cases where a decedent’s estate is substantial, or where there are multiple potential beneficiaries, and the goal is to establish a hierarchy, or pattern of succession, among such beneficiaries, in a manner that IRA distribution rules do not easily accommodate.
A trust is a natural choice to accomplish such objectives since the trustees control the trust beneficiary’s access to the financial resources held by the trust. A trustee must comply with both the terms of the trust, as well as the IRA beneficiary distribution rules that are specific to trusts.
Sometimes, however, a trust is named an IRA beneficiary when there is no compelling reason to do so. IRAs can be “swept up” in an estate planning process wherein a trust is to be funded with other financial assets, and the trust is named an IRA beneficiary for no other reason than that it has financial value. But doing so may, in fact, deny options that would otherwise be available to a person if they were named the IRA beneficiary.
Estates as Beneficiaries
An estate can become an IRA beneficiary in more than one way. It can happen when an IRA owner neglects to affirmatively name a beneficiary—either an individual or other nonperson—and the IRA contract’s default provisions declare the beneficiary to be the decedent’s estate.
Probate laws that govern intestacy (intestacy laws apply where an individual dies without a will and dictate who is entitled to the estate’s assets) vary from state to state. In general, intestacy laws give priority to the surviving spouse and children, followed by the decedent’s parents, siblings, and possibly more distant relatives. This may, or may not, align with the IRA owner’s wishes, and with what an IRA owner might have chosen had the IRA owner made a careful and thoughtful plan for the IRA assets upon his death.
Or, an individual may intend that his estate be the IRA beneficiary, believing—questionably—that through his last will and testament an individual can become the IRA beneficiary. This is generally not the case. Assets within an IRA could, through the probate process, be assigned to someone named in the will, but the estate remains the IRA’s true beneficiary. And, as such, it is subject to different distribution rules—generally less favorable—than those that would apply to a person who is named the IRA beneficiary.
Payout Limitations for a Nonperson Beneficiary
More rapid distribution of an IRA is a common consequence if a nonperson beneficiary such as a charity, estate, or trust, inherits an IRA. If the owner of a Traditional, SIMPLE, or SEP IRA dies before the required beginning date (RBD) for mandatory distributions, nonperson beneficiaries must generally distribute that IRA in its entirety within five years. If the decedent has reached the RBD, a nonperson beneficiary may use the decedent’s remaining single life expectancy—nonrecalculated—for the payout period. In some cases, this may be even longer than the 10-year maximum period typically required for many nonspouse individuals who inherit an IRA.
Roth IRAs do not require RMDs for the original owner, and therefore death is always “before the RBD”. Consequently, Roth IRAs require payout within five years for most nonperson beneficiaries.
The See-Through Trust Exception
Although a trust is a nonperson IRA beneficiary, and some trusts face the same payout limitations that apply to charities and estates, other trusts—called see-through trusts—are treated differently. If a trust meets the conditions of a see-through trust, then the ages of the trust beneficiaries can be taken into account when calculating the life expectancy payments. While the trust remains the true beneficiary, often see-through trust status results in a more favorable payout period, similar—or identical—to if such individuals had been named a direct IRA beneficiary. Worth noting, however, spouses who are trust beneficiaries rather than direct IRA beneficiaries generally do not have the privilege of treating an inherited IRA as their own IRA. IRS private letter rulings have, however, conferred that privilege to some spouse PLR applicants.
See-Through Trust Requirements
The final RMD regulations use the term “see-through” trust instead of the previously-used term “qualified trust,” but the requirements essentially remain the same. To be considered a see-through trust, a trust must meet the following conditions.
The trust is irrevocable (or becomes irrevocable upon IRA owner’s death)
The trust is valid under state law
The trust beneficiaries can be readily identified
Summary
For most who own a Traditional, Roth, SEP, or SIMPLE IRA, the most logical transfer of ownership upon death is to name a living person as the beneficiary. But there are options that may suit the needs and circumstances of other IRA owners. Importantly, choosing a beneficiary—whether person or nonperson—should always be an affirmative step taken after careful consideration and in conjunction with estate planning objectives.
