IRA Beneficiary Rights in California

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Beneficiaries have rights regarding IRA assets.
Beneficiaries have rights regarding IRA assets. (Image: woman with parents image by Pavel Losevsky from Fotolia.com)

An Individual Retirement Account (IRA) is designed to defer taxes until the owner needs income during retirement. Upon the IRA owner's death, beneficiaries receive the remaining accumulated cash value of the account. There are certain rights for beneficiaries who reside in California or receive the assets in the state.

Spousal Designation

An IRA owner who is not married may name anyone he chooses as the beneficiary to his IRA. However, community property states, including California, require that a spouse be named the beneficiary to an IRA if the owner is married. If no beneficiary is named, the spouse automatically receives the inherited assets. For those who are married but want to pass IRA assets onto other beneficiaries, the spouse must sign a waiver to the IRA assets. If no waiver is signed and another beneficiary is named, the spouse has the right to protest the designation and obtain the IRA assets.

Beneficiary IRA

When a beneficiary inherits an IRA, she has several choices of how to receive the money. Because IRA assets are considered part of the estate and the distributions are also added to annual income for tax purposes, it may not be beneficial to take a lump sum distribution on the assets. In lieu of the lump sum, a surviving spouse may take over the IRA as if it were her own, even commingling the assets with another personal IRA. Non-spousal beneficiaries may spread distributions over a five-year period, or they may open a "beneficiary IRA" and take minimum distributions over her lifetime, reducing the amount added to annual income and reducing the overall tax consequence on the assets.

Creditor Protection

IRA assets are protected from creditors in the state of California during the lifetime of the IRA owner. This means that if the IRA owner is experiencing debt problems or filing for bankruptcy, retirement assets such as IRA accounts are considered exempt up to $1 million dollars. If a beneficiary inherits the money, the IRA may be considered part of the estate and subject to debts in closing the estate. For beneficiaries opening an beneficiary IRA, the assets may become exempt from estate creditors, but if the beneficiary is subject to bankruptcy, California courts have ruled that the asset is not exempt from creditors' claims.

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