IRAs and Beneficiaries – an Important Checkup

Part two of two

In part one we talked about re-visiting your IRAs from time to time, especially as life changes occur, to ensure that your beneficiary or beneficiaries are up to date.

Many people aren’t aware that they can:

• Name more than one primary beneficiary.
• Name a contingent beneficiary or beneficiaries, who will inherit your funds should you and your primary beneficiaries pass away.
• Use percentages to split up beneficiaries’ inheritances.

When you set up an IRA, most fund administrators don’t call much attention to these options.  But with a bit of planning and maybe some guidance from your Estate Planning attorney you may find that some of these options are good for you and your heirs.  Also, changing beneficiaries in an IRA account is a simple process.

Note also that if you have a Trust or a Will in place, that naming your beneficiaries in your IRA will take precedence over a Trust or a Will unless you designate in your IRA document that your IRA funds should go to your estate.

Let’s talk a bit more about options when it comes to primary beneficiaries.

First, it’s a good idea to be familiar with these two terms as you are naming a primary beneficiary: per capita; per stirpes.  These terms may vary from one state to another.

The per capita arrangement addresses a situation where you have more than one primary beneficiary named, and one of them predeceases you.  The intent is to provide for any children that the beneficiary may have had.  An example: you have a son with two children and a daughter with no children.  Each of your children is named a 50/50 beneficiary in your IRA.  Should your son die before you do, the IRA beneficiary arrangement would change so that it’s split into three equal parts instead of two: equal parts for the two children and the daughter.

The per stirpes arrangement (it’s sometimes called rights of representation) is similar to per capita.  It does not affect any additional primary beneficiaries but it does deal also with a beneficiary who dies before you do.  It simply arranges for the children of that beneficiary to share equally in the IRA funds that you meant to leave to that beneficiary.

When naming beneficiaries be sure that you avoid general phrases such as “all of my children” – always state full legal names and their relation to you.

And be sure to consult with your Estate Planning attorney, who can help you plan your IRA beneficiaries in light of your other Estate Planning tools.  Note, too, that IRA withdrawals have tax consequences, so professional advice is recommended.