IRA Beneficiaries & Per Stirpes
I think I’m clear on the rule that if any “beneficiary” of an IRA is not a “designated beneficiary,” (living person) then the ability to stretch the IRA is lost for all.
Let’s say there are three children named equally as primary designated beneficiaries of an IRA. One child predeceases the IRA owner, then the IRA owner dies. We’re in a state where money left to a deceased beneficiary automatically goes to their estate.
What happens when the estate isn’t NAMED the beneficiary (on the form) but only BECOMES one when one of the designated beneficiaries is deceased. Does that rule still apply? Will adding Per Stirpes ensure this does not happen? And finally, would the grandchild(ren) use their life expectancy for the stretch or have to use their deceased parent’s age?
Permalink Submitted by Alan Spross on Tue, 2010-02-09 02:03
Your first statement is true as of the date the designated beneficiary is determined, which is 9/30 of the year following owner’s death. For example, if beneficiaries included a charity, the charity could be paid off before that date leaving only designated beneficiaries to determine the RMD schedule. Some beneficiaries can also file disclaimers by that date (subject to 9 month requirement also), and they would no longer be included.
While IRA agreements must conform to state regulations, it is possible that the state regulation does not apply to IRA agreements or allows for IRA agreement specific beneficiary provisions to prevail, so you should probably check out that issue. The answer will also apply to the “per Stirpes” situation since the beneficiary is obviously deceased if this provision is triggered. I have not heard of any states that do not recognize a per stirpes provision.
If the per stirpes holds up in your state, the individuals receiving the IRA funds under that provision are considered to be designated, and any grandchild could then use their own life expectancy for RMDs. But if the state provision requires the estate to trump the per stirpes designation, then the estate’s share of the IRA will have to be distributed to the estate prior to 9/30 of the year following death, or the stretch for the other beneficiaries will be sacrificed.
Permalink Submitted by Bruce Steiner on Tue, 2010-02-09 04:14
Some states have default rules for what happens if a beneficiary predeceases a testator or other transferor. But these rules are only default rules. In other words, they only apply if the testator or other transferor doesn’t specify what happens if a beneficiary predeceases.
In some states, the default is that a deceased beneficiary’s share goes to his/her issue. In some states, it goes to the persons who received the deceased beneficiary’s estate (either under his/her Will or by intestacy). If the original poster is correct, then in some states it goes to the deceased beneficiary’s estate.
In some states, these default rules only apply to beneficiaries who fall within specified relationships to the decedent. In some states, these default rules only apply to property passing under a Will. In other states, these default rules are not limited to property passing under a Will.
But these are only default rules. A properly drafted Will (or beneficiary designation) generally won’t rely on these default rules, but rather will specify what happens if a beneficiary predeceases the testator or IRA owner. For example, if I leave $1,000 to a friend, I might not want it to go to my friend’s children or beneficiaries or estate if my friend dies first. But if I leave one-half of my estate to a child, I might want it to go to the child’s children if the child dies first.