What happens if you designate each of your two adult children as 50/50 beneficiaries of your IRA, and then one of them dies? Will the funds go to your grandchildren?
MarketWatch answered that question in its article, “Who gets your IRA when you die? It’s not so simple.” The answer to what happens to the IRA money is dependent upon what the beneficiary designations say and when one of the children passes away. The beneficiary designations state how it will be distributed. However, that may not be what is written in your estate plan (will or trust).
If the children are alive when the IRA owner dies, and she simply named them 50/50 outright beneficiaries, they will each get half the funds. Each child could do whatever they wanted, including placing the funds in an inherited IRA account and naming their choice of beneficiaries.
However, if either child dies before the parent with the IRA passes away, and the parent has not updated the beneficiary designation before they die, there are two common default arrangements built into account forms for IRAs, retirement accounts, life insurance policies, annuity contracts, and “transfer on death” arrangements available in some states. One is per capita: if one child is dead at the time of the parent’s death and is still listed as a 50% beneficiary, then 100% of this share will go to the surviving child.
The other common arrangement is per stirpes—Latin for “by the root.” Here, rather than the predeceasing child’s share going to their surviving sibling, the share goes to the deceased beneficiary’s children.
Be sure to obtain a copy of what you filed for your beneficiary designations. You should carefully review the language to be certain that it aligns with your wishes. If you want your assets to flow differently, speak with an estate planning attorney about drafting a custom beneficiary designation. Some people don’t want one of their beneficiaries to inherit outright and have free reign with the funds. In cases where there is a large IRA, young children, special needs beneficiaries, or beneficiaries who need protection (from themselves or from others), a trust may be the best beneficiary. Please note, however, that in order to maximize income tax deferred benefits, special trust language and customized beneficiary designations should be prepared by an experienced estate planning attorney.
IRA planning requires careful consideration, and this is why at Family Estate Law Planning Group we have created procedures, documents and systems to make sure your beneficiaries are protected and income tax deferral is achieved consistent with the wishes of our clients.
Visit our website today to learn more about how we can help you plan for life to ensure your IRA funds go to the right heirs.
Reference: MarketWatch (March 17, 2018) “Who gets your IRA when you die? It’s not so simple”