In most cases, naming your spouse as the beneficiary of your IRA makes the most sense. However, depending on your wishes, other beneficiary arrangements may do a better job of accomplishing your goals.

First, let's take a quick look at the requirements and advantages of naming your spouse as the sole beneficiary of your IRA. Choosing another beneficiary will cause you to lose some of these advantages.

The first advantage allows the spouse to elect to treat the IRA as his or her own. When the objective is to delay the required minimum distributions (RMDs) for as long as possible, the spouse would generally elect this option. This election allows the spouse to postpone RMDs until they reach age 70 1/2 in the case of a traditional IRA or SEP. RMDs are deferred all the way to the death of the spouse if the IRA were a Roth. If the spouse is younger than the deceased IRA owner, this makes a lot of sense where deferral is desired.

Using the life expectancy of the spouse and a beneficiary is one of the spouse's options, thus potentially extending the payout period. If the spouse were not the sole beneficiary, the life expectancy of the IRA owner and beneficiary is the requirement. Given the fact that the IRA owner is older, this shortens the distribution period.

If the IRA owner dies before age 70 1/2, the spouse can defer the RMDs until the IRA owner would have reached age 70 1/2. If the IRA owner is younger than the spouse is, this could be an attractive option.

Despite these advantages and flexibilities, other beneficiary elections may make more sense.

Marital Deduction Trust

The use of a trust has many advantages such as the ability to "customize" the distribution of trust assets among beneficiaries, tax advantages and the ability to sprinkle income.

One main advantage of naming a marital trust as the beneficiary of your IRA is to include a QTIP provision (Qualified Terminal Interest Property). This allows the IRA owner to control where the property passes upon the death of the spouse. The most obvious use of a QTIP election is to make sure the children or a person are not disinherited due to the spouse's own subsequent beneficiary election or a second marriage.

Credit Shelter Bypass Trust

These trusts take advantage of the unified credit the law provides each person. In simple terms, a credit shelter bypass trust has two parts, Part A and Part B. It receives all the estate assets. The spouse typically receives income from both parts. However, at the death of the spouse, their part flows directly to (generally) the children, thus removing it from double taxation. Today, proper planning and the use of a credit bypass trust can move $4,000,000 to the children free of tax.

RMDs from the IRA are still required and based on the life expectancy of the oldest beneficiary of the trust (probably the spouse). The tax advantages of the Credit Shelter trust conflict with the ability to stretch the RMDs out for the long possible time.

Dynasty Planning

Here, the goal is to provide for as many generations of beneficiaries as possible, as opposed to planning solely for the spouse. Again, RMDs are still required. The name of the game is to spread the payouts over the longest period possible by using the youngest beneficiaries. The advantage is the IRA account continues to grow at interest. Under the right circumstances, a $100,000 IRA could pay out over 20 million dollars.

Traditionally, a dynasty trust is used. While "the rule against perpetuities" is not in effect in all states, generally a person can spread the payout over several generations. The maximum would be the life of anyone alive at the death of the creator of the trust, plus 21 years. However, as we have seen, for RMD purposes, the life expectancy of the oldest trust beneficiary is required when a trust is the beneficiary of an IRA.

One way to get around this is to establish a dynasty trust for each beneficiary. Alternatively, to keep it simple, just name each beneficiary separately (i.e. children, grandchildren) and forget about the trust.

While naming the spouse as the only beneficiary of an IRA has its advantages, do not just blindly make this election. The size of your estate, the situation of your beneficiaries and your goals are some of the factors that may require another choice. This is the time to sit down with your financial planner and an estate planning attorney and review all the options and their consequences.