In many families, both spouses have an IRA and name each other as the primary beneficiaries with their children as the contingent beneficiaries. However, that’s not the only way that you can pass down an IRA.
In USA Today’s article, “Tips on the best way to pass your IRA down to your child,” experts advise that when a child inherits the IRAs, the best way for him or her to avoid taxes and let the accounts grow, is to name the child as a "contingent beneficiary" (to inherit the IRA if the other spouse does not survive you). In that way, the child will be able to hold that account as an "inherited” IRA.
The child is entitled, under the current law, to withdraw the money gradually over his or her life expectancy. Although he or she must withdraw a certain amount each year (a required minimum distribution or RMD) and pay taxes on that amount, the RMDs are usually small, especially in the early years.
The account might last until the child reaches his or her mid-80s by taking advantage of the "life expectancy" or "stretch" payout.
However, there's nothing to prevent a child from withdrawing more than the RMD—or even cashing out the whole account right after you pass away.
In order to prevent this, the IRA owner would have to use a much more complicated strategy with the help of an estate planning attorney. Money could be placed in a “trusteed IRA” or the IRA could be left to a “see-through trust” for your child’s benefit.
There is another reason to consider changing your IRA distribution plan. Congress is considering legislation that would force a five-year payout for inherited IRAs over $450,000. You should speak with an estate planning attorney to explore the options for your family. It is also worthwhile to consider making a call to your elected officials in Washington to let them know how you feel about this pending legislation.
Reference: USA Today (November 10, 2016) “Tips on the best way to pass your IRA down to your child”