Estate as Beneficiary of Traditional IRA or Retirement Plan
Generally, following your death, your nonretirement assets will pass according to your will or trust or beneficiary designations (e.g., life insurance). If you do not have a will or trust or there is a gap in your beneficiary designations, the laws of your state (or the state where you own real property) will generally determine your heirs.
With IRAs and employer-sponsored retirement plans, when you die, the remaining funds generally pass directly to the beneficiary (or beneficiaries) you have designated. Spouses, children and grandchildren, trusts, and charities are common beneficiary choices. However, if you have a gap in your beneficiary designations, your estate may become the "default" beneficiary of your IRA and/or retirement plan benefits. This could occur, for example, if all of your designated beneficiaries die before you, and then you die before naming a new beneficiary.
With your estate as the beneficiary of your IRA or plan, the money in the account is first distributed to your estate, and then passes to your heirs according to the terms of your will. Having your estate as beneficiary is usually the worst possible beneficiary choice in terms of tax implications. In addition, you will sacrifice some planning options and potentially expose the retirement funds to extra fees, risks, and creditors.