IRA distribution
This scenario is potentially going to play out for an IRA distribution. It seems improper, is it legal or not?
The Owner of the IRA (lets say John) passed away with 3 primary beneficiaries. One primary beneficiary (let’s say Betty) passed away prior to taking the distribution. Betty had filled out a beneficiary form though, naming 1 primary beneficiary (let’s say Billy). The brokerage firm is now distributing John’s IRA directly to Billy. How can the IRA be directly distributed to someone who was never on John’s beneficiary form? The brokerage firm also wrote in an email that they only distribute to named beneficiaries and not to an estate. Then they said that if Betty had not filled out her beneficiary form, it would have gone to her estate. Either one or the other scenarios is true. The other 2 original primary beneficiaries of John’s IRA feel that the IRA should be distributed between the 2 of them only.
Thank you.
Permalink Submitted by Alan Spross on Tue, 2007-10-02 01:28
Actually, the brokerage firm is handling this in an entirely normal fashion. Very few IRA custodians will not allow a beneficiary to designate a successor beneficiary for their respective interest, and in fact a beneficiary is advised to name a successor ASAP so that their inheritance will go where desired.
Now, if Betty had failed to act prior to passing, there may be some difference in IRA agreement provisions. I believe the majority of agreements would direct Betty’s share to her estate, ie according to her will. There may be a few that direct it to the owner’s estate, surviving spouse or elsewhere.
The other two beneficiaries probably WOULD HAVE received Betty’s interest had Betty pre deceased John, but again the agreement should be checked. If John had wanted to be sure that Betty’s children would receive her share, he could have put a “per stirpes” designation after her name.
In other words, it is normal for the share in question to be treated in different fashion should the beneficiary pass after the owner vrs prior to the owner. This makes sense because it puts the control in the owner’s hands as long as the owner is alive and can make changes, but when the owner passes, his last changes prevail along with the agreement itself if default provisions come into play.