CWF's IRA/HSA Guidance - 2019 Assist With the Review and Updating of IRA Beneficiary Designations

It happens for various reasons, an IRA owner dies and his or her estate is the IRA beneficiary. The general IRA rule is, this situation should be avoided if at all possible unless the IRA owner has knowingly made the decision that he or she wants their estate to be the IRA beneficiary.

The purpose of this article is to suggest that IRA custodians/trustees should periodically review your IRA files and give your IRA owners the chance to update or change their IRA beneficiary designations. We are being told in consulting calls, our IRA owner recently died and the estate is the beneficiary because there was no one else designated as a primary beneficiary or a contingent beneficiary who was alive at the time the IRA owner died. Individuals who had been designated as a beneficiary had predeceased the IRA owner and no succeeding beneficiaries had been designated.

The general tax and administrative rule for traditional/SEP/SIMPLE IRAs is, it is preferred if an IRA owner designates a living person as a beneficiary rather than her or his estate. By designating a child or grandchild as a beneficiary the IRA owner will allow the designated beneficiary substantial flexibility in how and when the beneficiary would withdraw the inherited IRA funds and when federal income taxes would be paid. This is certainly true for a Roth IRA because the tax rules require a Roth IRA must be closed under the 5-year rule if the beneficiary is the estate versus earning tax free income for the life expectancy of the beneficiary if a living person has been designated as the Roth IRA beneficiary.

There will be times when a person designates a person as their contingent beneficiary and also a primary beneficiary. Then the contingent beneficiary dies and the IRA owner does not designate any succeeding contingent beneficiary and then the primary beneficiary dies.

In prior years, some individuals when establishing their IRA adopted the approach of naming their spouse as 100% the primary beneficiary and their estate as their contingent beneficiary. They thought this would ease the administration
of their estate.

If your institution has not had its IRA owners review beneficiaries for a number of years, now would be a good time to do so. Your IRA owners should, of course, act after considering the advice of their advisers, be it an attorney, accountant or knowledgeable family member.