What Happens to My Self-Directed IRA When I Die? Preserve Your Wealth
Key Takeaways
Without proper preparation, most heirs default to liquidation because they don't understand the assets or strategy.
The 10-year rule gives beneficiaries flexibility, but only if they understand your investment strategy.
Proper documentation and heir education can turn your SDIRA into a multi-generational wealth vehicle.
I’ll never forget the phone call I received from a client’s adult son about six months after his father passed away.
His dad spent twenty years building a $4 million self-directed IRA real estate portfolio: carefully selected rental properties generating solid cash flow, each one held for long-term appreciation. The son called and explained that none of them really understood the properties or what to do with them, and that they’d “rather just have the cash.”
Within 18 months, that entire portfolio, twenty years' worth of work, was liquidated and gone. Properties sold below market value. Massive tax bills. And it was all completely preventable with proper planning.
That's the reality every self-directed IRA owner needs to understand when thinking about IRA and estate planning.
What Happens to Your Self-Directed IRA When You Pass?
When you’re gone, your self-directed IRA becomes an inherited IRA for your designated beneficiaries.
For non-spouse beneficiaries…
They must withdraw the entire inherited IRA within 10 years of your passing. This is the “10-year rule” established by the SECURE Act. Now, how they take those distributions is up to them, but the account must be emptied by the end of year ten.
For spouse beneficiaries…
Spouses have different options. They can treat your IRA as their own (and continue your strategy), roll it into their existing IRA, or take it as an inherited IRA with more favorable distribution rules.
As for the tax implications…
If you have a traditional self-directed IRA, every dollar your beneficiaries withdraw is considered taxable income. If you’ve built your wealth in a Roth self-directed IRA and the account has been open for at least five years, those distributions are tax-free.
When your beneficiaries inherit your self-directed IRA, we walk them through their inherited assets and beneficiary IRA rules. We explain what’s in the account and the compliance and distribution requirements.
But we cannot make them follow your investment strategy. At Chicago Trust Administration Services (CTAS), our role is compliance education and administration. The actual investment decisions (what to sell, what to hold, when to take distributions) belong to your heirs and their advisory team.
What really happens to your legacy depends entirely on the groundwork you lay while you’re still alive.
The Gap Between Your Portfolio Vision and Their Understanding
Many beneficiaries inherit self-directed IRA portfolios they don’t understand, containing assets they’ve never heard of, following strategies nobody ever explained to them.
When your heirs receive notice from CTAS, if you haven’t prepared them, they’ll likely default to liquidation.
This is entirely rational from their perspective: they’re grieving and suddenly managing an estate. They’re dealing with dozens of other financial and legal matters.
While they’re overwhelmed, liquidation becomes the obvious choice.
The Generational Wealth Opportunity With Proper Planning
Consider a Roth SDIRA holding $2 million in rental properties generating $150,000 annually in net rental income. Over ten years, that's $1.5 million in tax-free cash flow to your beneficiaries. If those properties appreciate at 3% annually, they're worth approximately $2.7 million by year ten. The entire $700,000 gain is tax-free in the Roth IRA.
Total wealth transfer: $4.2 million over ten years, none of it taxable.
Compare that to unprepared heirs who liquidate everything in year one and walk away with $2 million minus capital gains taxes from a rushed sale.
The difference isn't market timing or investment selection. It's preparation, education, and documentation.
The Estate Planning Mistakes That Lead to Premature Liquidation
In my experience working with sophisticated self-directed IRA investors, several critical mistakes lead to wealth destruction:
Never documenting your investment thesis. You know why you bought each asset, the cash flow projections, the appreciation potential, and the exit strategies. If that knowledge lives only in your head, it's gone when you are. Your heirs make decisions in a vacuum.
Failing to educate heirs about alternative assets. If your children grew up with 401(k)s and index funds, they don't instinctively know how self-directed IRAs work. Without foundational education, they can't execute your strategy.
Not introducing heirs to your professional team. Your relationships with CTAS, your estate planning attorney, accountant, and property managers represent institutional knowledge your heirs need.
Assuming they'll "figure it out." Your heirs might be brilliant and financially sophisticated. But they're not you. Smarts aren't a substitute for preparation.
Not building liquidity reserves. If your IRA is 100% illiquid with no cash reserves, heirs face immediate pressure to sell just to cover operating expenses, forcing premature liquidation.
Making beneficiary designation errors. Outdated beneficiary forms create immediate problems. Your IRA beneficiary designations override your will, so accuracy matters.
Your Action Plan: Protecting Your Legacy
Those are the mistakes to avoid; these are the steps to follow:
1. Document your investment strategy in writing. Create a comprehensive document explaining each investment: why you bought it, the long-term strategy, exit criteria, and potential pitfalls. Update it annually.
2. Create an "SDIRA Playbook" for your heirs. Include account numbers, contact information for CTAS and your professional team, asset locations and details, property management contacts, partnership agreements, and instructions for accessing essential documents.
3. Introduce your heirs to CTAS. We'll meet with you and your beneficiaries to explain how inherited IRAs work and what they'll need to do, establishing a relationship before it's needed in a crisis.
4. Build liquidity reserves within your IRA. For real estate holdings, maintain cash reserves equal to three to six months of expenses per property.
5. Coordinate with your estate planning attorney on beneficiary designations. Make sure they're current, accurate, and aligned with your overall estate plan. Review them after major life events.
6. Review and update everything annually. Set an annual standing appointment to review your entire estate plan, including your SDIRA component.
Protect Your Wealth Today
You've spent decades building wealth through your self-directed IRA. The question is whether that wealth will survive after you're gone or evaporate in an unprepared transition.
At Chicago Trust Administration Services, we've seen both outcomes: well-planned wealth transfers that provided for families for years and preventable liquidations that destroyed generational wealth in months. The difference is always preparation — documenting your strategy, educating your heirs, and building the bridge between your vision and their understanding.
To discuss how your self-directed IRA fits into your estate planning strategy, we invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com.
Frequently Asked Questions (FAQs)
Q: What happens if I don't update my beneficiary designations?
A: Your IRA beneficiary designations override your will, so outdated forms mean the wrong people may inherit your SDIRA regardless of your intentions.
Q: Does the 10-year rule apply if I'm already taking required minimum distributions?
A: The rule applies regardless of your age or RMD status when you pass away.
Q: Can my beneficiaries contribute additional funds to the inherited SDIRA?
A: No, inherited IRAs cannot accept new contributions. Beneficiaries can only manage, hold, or distribute the existing assets within the 10-year timeframe.
*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.