This week’s column is a continuation from last week discussing IRA beneficiary designations. One of the questions not answered last week was what happens if a child is named as a beneficiary and dies before the IRA owner. Obviously, the IRA owner could remove or replace the deceased beneficiary with another, but people don’t always have the chance to make changes to documents.
A beneficiary designation usually supersedes any other instructions, including those in your will. You can change your beneficiary designations as often as you like, but the designations are irrevocable upon your death. The named primary beneficiaries will inherit upon your death. If one or more of your primary beneficiaries is deceased, their assets will be divided proportionately among the surviving primary beneficiaries. If all primary beneficiaries are deceased, the assets will be inherited by the named contingency beneficiaries.
If you want the children of a deceased child (your grandchildren) to inherit that child’s portion of the IRA you would use the legal term in Latin per stirpes “by branch.” “To my decedents who survive me, per stirpes.” This designation would distribute the deceased child’s share to their children in equal amounts. Example: You have four children, A, B, C and D listed as primary beneficiaries to inherit in equal amounts per stirpes. Child A dies and has one child, A1; B dies and has two children, B1 & B2; child C has no children; and child D has one child, D1. Upon your death, children C and D each inherits 25 percent of your IRA. Grandchild A1 inherits 25 percent, and grandchildren B1 and B2 each inherits half of 25 percent. Think of each child being a “branch” of the family, and each branch receives an equal share.
As stated last week, non-spouse beneficiaries have the ability to take distributions over their life expectancy. This allows distributions to be stretched over many years, allowing years of tax deferral on the assets within the IRA. As part of the Highway Investment Job Creation and Economic Growth Act of 2012, there is a budget proposal that would require most non-spouse inherited IRAs to be liquidated within five years of the IRA owner’s death. This is only a proposal at this time and may never become law, but IRA owners should be aware of pending legislation. Since it is being discussed, this proposal should be taken into account when making estate planning decisions relating to an IRA.
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When a non-spouse inherits an IRA, there are certain rules that must be followed. I will address those next week.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624