If you own an IRA, you probably want it to pass to the correct beneficiaries. I seriously doubt you want an accidental beneficiary inheriting your hard-earned assets.
Knowledge is power and you need to be aware of the rules governing how IRAs are inherited. To help provide insight, we created this quick quiz based on situations frequently seen at Maestro Wealth Advisors. How many can you get right without looking at the answers?
- The IRA owner has four children and the oldest is beneficiary and executor. The will divides all assets equally among all four children. Who gets the IRA?
- On the advice of his attorney, the IRA owner establishes a trust for his spouse. The trust is beneficiary of the IRA. Who gets the IRA?
- A wealthy couple create a will. His assets are left to their children while her assets are left to charity. However, her IRA beneficiary form designates her husband. Who gets the IRA?
- An IRA owner divorces. He remarries, but fails to update the beneficiary designation form for his IRA. He dies 10 years later and leaves his estate to the second wife. His IRA still names the first wife as beneficiary. Who gets the IRA?
- Jane purchased an IRA twenty years ago. After numerous bank mergers she dies, and the beneficiary form for her IRA cannot be found. Who gets the IRA?
Tom is divorced and names his minor children beneficiaries of his IRA. He dies while the children are still minors. Who gets the IRA?
- The oldest child gets the IRA, and most likely the tax liability. He may be able to disclaim the IRA or gift some of the RMDs to his siblings. A disclaimer generally means the IRA goes to the estate before passing to the siblings. This results in much less favorable distribution options.
- The trust gets the IRA. RMDs have to go to the trust first, and then pass to the spouse in accordance with the terms of the trust.
- The spouse gets the IRA. IRAs only pass through the will when the estate is beneficiary.
- The first wife gets the IRA. IRAs pass through the beneficiary designation form, not through the will.
- Unless the beneficiaries have a copy of the beneficiary form that has been acknowledged by the bank, Jane’s IRA passes in accordance with the default options in the IRA agreement. Some IRA agreements default to the spouse first, or to the deceased’s children if there is no spouse. Many agreements default to the estate. Distribution options for beneficiaries who inherit through the estate are far less favorable than those for beneficiaries named on a beneficiary form.
Bonus Question Answer
Minor beneficiaries cannot sign paperwork for inherited IRAs. In addition, they can’t manage investments or request RMDs. Because of this, the IRA custodian may require the court appoint someone to handle the inherited IRA on their behalf. This custodial arrangement remains in effect until the children reach the age of majority or until state laws can apply. In this situation, it’s also possible the court could name the ex-spouse custodian.
An Accidental Beneficiary
Unfortunately, errors can result in an accidental beneficiary, a higher tax bill, and significantly reduced assets passing to those you intended to inherit.
Maestro Wealth Advisors can help ensure those you want to inherit actually do inherit. As a full-service firm, we review your documents to identify and correct errors in your beneficiary designations. We also coordinate your financial accounts based on the direction provided in your legal documents. Give yourself peace of mind, and your heirs a smooth transition by calling us at 336-448-1086 today.