IRA Beneficiaries
I have a client who wants to name 3 individuals as co-primary beneficiary while also having her college receive 10% or $100k for a specific program and a needs-based scholarship. She has 4 retirement accounts which total roughly $550k in the aggregate.
I just want to confirm that naming this educational institution will not eliminate the ability of the 3 designated beneficiaries to stretch out the IRA distributions over their lifetimes (or the account owners to the extent she was already taking RMD’s).
She is very specific in how she wants the funds to be used; is it common to provide such specificity on the custodian’s beneficiary designation form?
Thank you.
Jason
Permalink Submitted by Alan - IRA critic on Fri, 2013-02-01 16:44
Most IRA custodians limit acceptance of lengthy beneficiary designations. While inclusion of the charity in the designation does present some risks if things are not handled efficiently after the owner passes, it will not impair the individual life expectancy RMDs if:
Naming the college would only affect her RMDs while living if she was able to name a sole spousal beneficiary more than 10 years younger, but she is not naming a spouse at all, so no affect.
Permalink Submitted by Bruce Steiner on Fri, 2013-02-01 21:14
If she has $550,000 there, they might be more flexible as to what they’ll accept.Naming 3 individuals and a charity in whatever percentages she wants isn’t particularly complicated. The complicated part is how she would want a beneficiary’s share to go if that beneficiary were to predecease her. Whatever she decides, she has to prepare the beneficiary designation form (and rider, if necessary) in such a way that there’s no question as to who gets what.
Permalink Submitted by mk foss on Sat, 2013-02-02 22:23
My recommendation would be to put the amount she wants to go to charity in a separate account and name the charity the beneficary of that one. She might have to do this at a separate institution because of the policies of some custodians when there are multiple IRAs with differing beneficiaries. It will be much simpler for the other beneficiaries if they don’t have to worry about the charity once they inherit.
Permalink Submitted by Bruce Steiner on Sun, 2013-02-03 13:51
The difficulty with separate IRAs with different beneficaries is that over time the relative values of the separate IRAs may change.
Permalink Submitted by Jason Hochstadt on Sun, 2013-02-03 21:16
Thank you for your feedback. If she really wants 10% to go to the educational institution, provided this equals no more than $100k (which can easily be tracked over time given the value of the IRA’s) then it would appear she needs to include the educational institution as one of the beneficiaries for each IRA based upon the total value of all 3 being around $550k. Otherwise, she could simply make a bequest in her Last Will or Revocable Trust of $100k to the institution – although the beneficiaries (assume the 3 for the IRA’s as the same as under the Will/Rev. Trust) would prefer to receive assets from the gross estate since the residue should represent after-tax amounts, whereas the Inherited IRA’s are subject to yearly RMD’s as well as income tax.Lastly, I just want to confirm that, assuming the Inherited IRA’s are established timely, each beneficiary would use the Single Life Table based upon either the account owner’s age (if she had already commenced taking RMD’s) or each beneficiary’s table factor (if she had not yet commenced taking RMD’s). What would happen if the account owner passed away the year she had to take RMD’s – would this have to be based upon her life expectancy or could each beneficiary stretch it over theirs? Also, if a beneficiary happens to be older than an account holder, can the beneficiary take RMD’s over the account owner’s life expectancy table – whether or not the account owner had begun RMD’s?Thank you!
Permalink Submitted by Alan - IRA critic on Mon, 2013-02-04 01:46
If the inherited IRAs for the individuals are established by the deadline, each beneficiary can use their own life expectancy for RMDs regardless of when the IRA owner passes. Table divisors are based on beneficiary attained age in the year after the owner’s death.One exception to this applies if the beneficiary is older than the decedent AND the decedent passes AFTER their required beginning date. In that case the beneficiary can use the decedent’s remaining life expectancy for RMDs. The starting year for table divisor determinations is the decedent’s age in the year of death in this situation.
Permalink Submitted by mk foss on Mon, 2013-02-04 01:51
Instead of having the charity named as a beneficiary of each IRA it seems that a new IRA with the 10% amount (55k) could be created with charity as the beneficiary. Once a year additional sums could be transferred to this IRA from the others so it still equals 10% of the total. Once the 100k is reached the excess can be withdrawn or transferred to the other IRAs. I guess that seems easier to me than watching 3 accounts each of which have a charitable beneficiary.Since a charity has no life expectancy failure to distribute it timely after the death of the owner could cause problems for the other beneficiaries who wish to use their own life expectancies.