Money Matters

Advice on crafting beneficiary designations for an IRA

March 9, 2013 

Q. I have three married sons. I have a rather large IRA and all three are listed as equal beneficiaries. I’m concerned about what will happen if one of them should predecease me. Does that son’s share go to the other sons or to his wife and my grandchildren as his heirs? Also, is there any way to restrict withdrawals from an inherited IRA to the required minimum distribution? This would be fairly large due to my age and the account value of the IRA, and I don’t want the boys taking out more than required.

A. If your IRA is a substantial asset, I suggest you seek personalized professional guidance on the available beneficiary designation options. As a start, the general information provided below may be helpful.

It would be good to check with your IRA custodian and see if they have any default beneficiary options if a listed beneficiary has predeceased the IRA owner and you have not designated an option. In most cases, if you name beneficiaries and one of them predeceases you and you have not updated the designation, the share belonging to the deceased beneficiary automatically goes to the listed surviving beneficiaries.

You may wish to consider a “Per Stirpes” distribution. The means that the distribution will be divided among your sons, but if a son dies before you, his share will be divided equally among those of his children who are alive at your death. If a member of a class of beneficiaries who is closest in relationship to the person making the distribution is deceased and survived by any decedents, then the deceased beneficiary’s decedents will take “by representation” what their deceased parent would have taken.

Example: You have children Andy, Ben and Chuck. Andy is the only one with children, Dan and Evelyn, who have no children. If all of your children survive you, Andy, Ben and Chuck each receive 1/3 of the IRA. If Andy predeceases you, Ben & Chuck each receive 1/3 of the IRA, and Dan and Evelyn each receive 1/6 of the IRA (Andy’s share divided by 2). If only Ben predeceases you, Andy and Chuck will each receive 1/2 of the IRA. Ben no longer has a share since he predeceased you and doesn’t have any descendants. If Andy and his son Dan predecease you, Ben and Chuck will each receive 1/3 of the IRA as will Evelyn. Evelyn will take what Andy would have received, and no share is created for Dan since he has no descendants. A Per-Stirpes designation will not provide any distribution to your daughters-in-law.

Another option is a “Per-Capita distribution.” This means that all living members of the listed beneficiaries will receive an equal share. Using the above examples and assuming you want to include your grandchildren as beneficiaries, here is what happens with a Per-Capita designation. If all of your children and grandchildren survive you Andy, Ben, Chuck, Dan and Evelyn each receive 1/5 of the IRA. If Andy predeceases you, Ben, Chuck, Dan and Evelyn each receive 1/4 of the IRA. If only Ben predeceases you, Andy, Chuck, Dan and Evelyn will each receive 1/4 of the IRA. If Andy and his son Dan predecease you, Ben, Chuck and Evelyn will each receive 1/3 of the IRA.

If you have a sizable IRA, you may wish to have a customized beneficiary designation. Some custodians will allow this, and some will not. You can explore the various options with an estate planning attorney.

Some custodians have a specialized beneficiary restriction form. This provides a way to limit distributions from the IRA to the required minimum distribution (RMD) amount up until age 50. The RMD is calculated on the beneficiary’s age, not the age of the deceased IRA owner.

Be careful with designations and restrictions that may have unintended consequences. Examples: If a child or grandchild becomes ill you may want them to have access to funds sooner than later. An inherited IRA to a minor may require a guardianship or trigger generation skipping tax issues. A good attorney or financial adviser can help determine what type of beneficiary designation will meet your needs.

Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at or P.O. Box 97128, Raleigh, NC 27624

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