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Planning Suggestion for an IRA Beneficiary Designation-Consider the Primary Beneficiary Might Want to Disclaim

Posted by James M. Carlson
Jul 11 2016

An IRA accountholder should almost always designate a primary beneficiaryand also designate one or more contingent beneficiary(ies). In some older IRA files the IRA accountholder has not designated a contingent beneficiary. In such situation, almost all IRA plan agreement forms provide that the IRA funds will then be paid to the decedent's estate. Tax options are not as many or as beneficial when an estate is the inheriting IRA beneficiary.

Be nice to your IRA clients and remind them periodically they should review and update their beneficiary designations, if appropriate. Of course, your IRA accountholders should be seeking the guidance of their legal and tax advisers.

Situation. John and Mary are now intheir 80's. Mary has $115,000 in her IRA. John has his own IRA with a balance approximating $75,000. Each has designated the other as their IRA beneficiary, but they did not designate any contingent beneficiaries. They have two daughters and a son. Mary died on July 8, 2016.

John has come into the bank because he wants these funds to go to the three children rather than himself. He believes this is what Mary wanted. That is, he wants three inherited IRAs set up for the three children.

The IRA custodian must not accommodate him. It would be tax fraud. It cannot be done since Mary had not designated the children as her contingent beneficiaries. If she would have designated the three children as her contingent beneficiaries and then John would have executed a valid disclaimer, then the desired result of having these IRA funds be inherited by the three children could have been realized. But this was not done.

If John executes the disclaimer now, Mary's estate will inherit her IRA and would have to comply with the RMD' rules applying to an estate beneficiary. John most likely would be making the situation worse. He will be better-off if he elects to treat Mary's IRA as his own and then withdraws only the RMD each year. He will, of course, name his three chi-dren as his IRA beneficiaries.

In summary, be nice to your IRA clients and remind them periodically they should review and update their beneficiary designations. In order to retain the flexibility of a primary beneficiary disclaiming his or her interest, one or more contingent beneficiaries need to have been designated by the deceased IRA accountholder. If so, additional planning options are then available

Categories: Pension Alerts, Traditional IRAs