What Should I Know about Beneficiary Designations for IRAs?

Odds are that you’ve spent some time and effort creating your will. You’ve discussed the provisions with your attorney and reviewed the document before signing it.

Fed Week’s recent article, “Pay Special Attention to Beneficiary Designations for IRAs,” says that, in contrast, with your IRA, you probably spent much less time planning for its ultimate disposition.

Beneficiary designations let you transfer assets directly to individuals, no matter the terms of your will. They’re often made when establishing a financial account, retirement account, or life insurance policy.

A bank, brokerage firm, or mutual fund acting as custodian will have a standard beneficiary designation form, and you likely take only a moment or two to write in the name of your spouse or the names of your children.

If you have only a little in your IRA, this type of cursory treatment may make sense; however, folks may have tens of thousands–even hundreds of thousands–of dollars in their IRAs. If you have an asset that large, you need to spend more time and effort planning for its ultimate disposition.

One approach to consider is to prepare a customized beneficiary designation form. An experienced estate planning attorney familiar with retirement plans can prepare such a form.

In this form, you can address various possibilities. That includes if the beneficiary predeceases you or becomes incompetent and if you and your beneficiary die in a common disaster. These events aren’t nice to think about, but they’re the issues usually covered in a will. As such, they should be addressed if a large IRA is at stake.

Note that you can also name your estate as the beneficiary. In that case, the retirement account or life insurance benefit becomes part of your estate and will be distributed according to your will.

Also, you can designate assets as “per capita” or “per stirpes.” Per capita means the assets are divided equally among your beneficiaries at your death. Per stirpes means that assets designated to a specific individual pass to his or her descendants if this person passes away before you.  So, if you designate your son and daughter to each receive 50% of an asset, if either dies before you, the share they would’ve received goes to their children.

Remember to review your beneficiaries and your needs regularly. Birth, death, marriage, and divorce in the family are common life situations that can change how you want your beneficiary designation structured. Update your beneficiary designation forms as a life change happens.

Reference: Fed Week (July 5, 2023) “Pay Special Attention to Beneficiary Designations for IRAs”