Beneficiary Designations
Hello,
1. In NJ, if a husband will not be leaving his IRA to his wife, must his wife sign as spousal consent authorizing this, with the signature notarized (NJ is a martial property state)? I believe the answer is yes but would like to confirm.
2. Is it possible for an IRA owner to name as contingent beneficiaries, equally, all future grandchildren (even if there are none presently and assume there are none at the time of the IRA holder’s demise)?
3. Exactly how should an Inherited IRA be titled for a non-spouse beneficiary to ensure it includes the name of the IRA owner who passed away F/B/O the beneficiary? Please also confirm that the non-spousal beneficiary must commence taking distributions by 12/31 of the year following the IRA owner’s demise. Also, when the non-spousal beneficiary retitles the account it cannot be rolled over because he/she is not a spouse. Accordingly, does the non-spousal beneficiary simply become the owner by virtue of the account retitling and take distributions based upon single life expectancy (Table minus 1)?
Appreciate your feedback. Thank you.
Jason
Permalink Submitted by Alan Spross on Tue, 2012-01-03 18:52
1) This is true of ERISA plans (eg 401k), but not for IRAs except in community property states. NJ is not a community property state and does not recognize community property for couples moving in from community property states. Therefore, the IRA owner in NJ should be able to name any IRA beneficiary without a spousal waiver.
2) Usually this is done by showing the child “per stirpes” or “per capita” as the beneficiary. If the child disclaims the funds would go to the grandchildren unless the IRA agreement indicated otherwise. Some IRA custodians may not accept this form of beneficiary because it opens up distribution rights to unlimited and unnamed potential beneficiaries as a result potential legal exposures for the custodian. If interests of unborn beneficiaries at IRA owner’s death are to be considered, the IRA owner should consider establishing a trust eligible for “look through” treatment and naming the trust as IRA beneficiary.
3) Yes, a non spousal beneficiary must commence RMDs by 12/31 of the year following owner’s death. The IRS requires that both the decedent’s name and the beneficiary are shown on the inherited IRA, but the order is flexible and an IRA custodian’s processing platform may require a specific order of the two names. As indicated, any change of IRA custodian must be done by direct trustee transfer and no indirect rollovers are permitted. RMD divisor is based on beneficiary age in the year following owner’d death and that divisor is reduced 1.0 for each successive year. Separate account rules allow for multiple beneficiaries to create separate accounts by 12/31 of year following death to allow each beneficairy to use their own life expectancy, rather than having to use the age of the oldest beneficiary.
Permalink Submitted by Jason Hochstadt on Sun, 2012-01-08 17:01
Hi Alan,
Thanks for the reply.
In terms of #3, I know there are three tables to use for RMD’s: (1) Joint & Last Survivor, used by an account owner whose sole beneficiary of the account is his/her spouse AND he/she is more than 10 years younger than the account owner; (2) Uniform Lifetime Table, used by accounts owners whose (a) spouse is not the sole beneficiary or (b) whose spouse is not more than 10 years younger; and (3) Single Life Expectancy Table used by beneficiaries.
I am confused regarding #2 and #3. Suppose an account owner names his son as the primary beneficiary of his IRA; it thus becomes an Inherited IRA, which RMD’s by 12/31 of the year following the year of death. Would the son use the Uniform Lifetime Table OR the Single Life Expectancy Table? On IRS Pub. 590, page 102 has the Uniform Lifetime table but only commencing at age 70. The Single Life Expectancy Table on pages 86 – 87 commences at age 0 – so I assume it would be the Single Life Expectancy Table as son is
Permalink Submitted by Alan Spross on Sun, 2012-01-08 19:22
Yes, a non spouse beneficiary must use the single life table for RMDs and reduce the initial divisor by 1.0 for each successive year.
With respect to a surviving spouse, they have would also use the single life table as long as remain in beneficiary status rather than ownership status. However, a sole surviving spouse beneficiary does not have to begin RMDs until deceased spouse would have reached 70.5, and when these RMDs begin the surviving spouse uses a new divisor each year rather than reducing prior divisors by 1.0.
After the owner’s death, the uniform table cannot be used until the survivor assumes ownership of the IRA. The > 10 year age difference is no longer a factor.
Surviving spouse can roll over or assume ownership at any time, but once done they cannot ever revert to beneficiary treatment. A surviving spouse might keep beneficiary status until:
1) They reach age 59.5 – this allows them to take penalty free distributions before 59.5
2) Or deceased spouse would have reached 70.5 – this allows them to avoid any RMDs until then even when surviving spouse is over 70.5
Once neither of those situations apply, it is best to assume ownership as ownership RMDs are always less than beneficiary RMDs after beneficiary RMDs must begin because they contemplate joint life expectancy with a spouse 10 years younger. including for single IRA owners.
NOTE: A surviving spouse can qualify for “sole beneficiary” status if not the only original beneficiary by using the separate account rules. They must create the separate account no later than the end of the year following spouse’s death.
NOTE 2: When the surviving spouse becomes the owner, their RMD is based on them having been owner all year, except when they become owner in the year of death.