IRA Beneficiaries

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General

An IRA owner can name a beneficiary or beneficiaries for an IRA account. A beneficiary is an individual who will inherit the account upon the death of the owner.

Anyone or anything can be named as a beneficiary. An accountholder has the option of not naming a beneficiary. There is no limit to the number of beneficiaries that can be named for an individual retirement account.

Primary beneficiaries inherit the individual retirement account upon the death of the owner. Contingent beneficiaries inherit the account only if all primary beneficiaries have predeceased the account owner or there are no primary beneficiaries remaining on the account due to disclaimers.

Beneficiary Designations

Most IRA agreements provide an area to name beneficiaries. Not only the name, but the address, phone number and Social Security number of each beneficiary should be entered.

Beneficiaries can also be named under the terms of the retirement agreement. Although this has not been a common practice in the past, it may become one in the future. A clause in the agreement which says “If at my death I have not named a beneficiary, the beneficiary is my wife” would be legal.

The IRS has also ruled that beneficiaries do not have to be designated by name. A statement such as “my children” is sufficient as long as the oldest child can be identified by December 31 of the year after the account owner’s death. Although legal, this is a very dangerous proposition for obvious reasons. No custodian or trustee in their right mind would accept this clause.

If an individual retirement account has no beneficiary, generally, the funds are paid to the account owner’s estate. Some individual retirement account documents may contain different language, so it is important to check the provisions of the plan document.

Individual retirement owners who live in community property states(Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin) are required to name their spouse as the sole primary beneficiary of an IRA, unless the spouse expressly declares that he or she is giving up all rights to the account. This area is subject to state law, not Federal. Not naming a beneficiary, naming a non-person as a beneficiary, naming one’s estate as a beneficiary, or naming a non-qualified trust as a beneficiary results in an account having no designated beneficiary for required distribution calculation purposes.

Disclaimers

If legal procedures are followed, beneficiaries can disclaim an interest in an IRA; however, such a beneficiary cannot redirect their share to anyone who would not receive the funds under the terms of the decedent’s account agreement.

Disclaimers must comply with both federal and state law. Disclaimers must be prepared by a lawyer and reviewed by the custodian or trustee’s legal counsel.

Beneficiary Changes

Individual retirement account owners (except in community property states) can change beneficiaries at will -- remember, it’s their money and their bacon.

Except for the “young spouse” option, most beneficiary changes have no effect on required distribution calculations for IRA owners. This is due to the uniform distribution calculation.

Under the “young spouse” option, a change in the beneficiary will result in a change in the required distribution calculation. If a young spouse is removed for any reason, the calculation will switch to the uniform table for the distribution year the year after the removal. If an owner using the uniform table marries a young spouse the calculation will switch to joint life for the distribution year the year after the marriage.

Unless prohibited by the terms of the account agreement, by state law, or by the terms of a power of attorney, an individual given a legal power of attorney for an account owner may be able to change the beneficiaries of an account before the death of the owner. This matter should always be reviewed by the custodian or trustee’s legal counsel before acceptance.

No one can change the beneficiaries of an individual account owner after the death of that owner; however, a beneficiary can name a subsequent beneficiary to receive their remaining share of the account at their death.

Marital Status

According to the IRS, an individual is a spouse or surviving spouse if such an individual is treated as a spouse under state law. This appears to be in conflict with the United States Defense of Marriage Act. When in doubt, any problems should be referred to the custodian or trustee’s legal counsel.

Marital status is determined at January 1 of each year.

If an account owner is married on January 1 and a spouse is the sole beneficiary, but he or she gets divorced or the spouse dies, the spouse remains the designated beneficiary for the entire year.

If the spouse dies, that spouse remains the designated beneficiary even if a new beneficiary is named.

If a divorce occurred and a new beneficiary is named, the new beneficiary will be the designated beneficiary for the entire year.


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