Unborn IRA Beneficiaries
An IRA’s beneficiary designation reads in part: $10,000 to each of my children. The owner dies in 2021 with two children and a pregnant wife, who gives birth in 2022. Does the third child get a $10,000 inherited IRA? My inclination is, “Yes.” Table I begins at age 0, not at age 1 and the third child attains age 0 in 2022. These minor children of the deceased IRA owner can stretch their inherited IRAs during their minority, even under the horrendous SECURE Act.
Now consider unborn grandchildren. Suppose that an IRA’s beneficiary designation reads in part: $10,000 to each of my grandchildren. The owner dies in 2021 with two grandchildren and a pregnant daughter, who gives birth in 2022 and who may have additional children. Does the third grandchild get a $10,000 inherited IRA? Again, my inclination is, “Yes.” Can the IRA be held open to provide shares of $10,000 to additional possible grandchildren of the owner? My inclination is, No.” Why can it or can’t it be held open to provide for future grandchildren?
Permalink Submitted by Norman Cook on Fri, 2021-04-02 18:31
I am no lawyer, but I believe the trust must be available to all possible after born children and grandchildren.The real question is how do you determine “the last grandchild” and who gets the remainder of the money. I do know that terms like “All my issues living from time to time” are valid to cover many generations of beneficiaries. Depending on the state one lives in and whether it has a rule against perpetuities this type of trust could run for hundreds of years or until it ran out of funds.
Permalink Submitted by Alan - IRA critic on Fri, 2021-04-02 19:15
While custodians should only accept beneficiary designations that conform to the beneficiary clause in their IRA agreement, mistakes can occur. For example, the Vanguard IRA agreement beneficiary clause states that ” any person or persons designated as a beneficiary must be alive at the time of the investor’s death.”
In those few cases where a custodian acepts a beneficiary designation which conflicts in any way with their agreement, the IRA owner should immediately check into and resolve the conflict. The last thing any custodian wants is to be involved in litigation with beneficiary interests following owner’s death. And owner’s should avoid complicated beneficiary scenarios that may eventually invite litigation.
While suspending distributions to other beneficiaries for up to 10 months would resolve any unborn beneficiary issues, and not impede on other deadlines or appear to affect disclaimers, this could still discourage custodians from accepting these conditions, if legal in the state of residence.
The IRS may have issued guidance of some sort regarding unborn beneficiaries, but I have not located any such guidance. Trust beneficiaries present a different set of issues.