The answer lies in the breakdown of the types of IRA beneficiaries.

1) Non individual beneficiary (eg estate, trust, or charity).
2) Individual beneficiary – ONLY an individual beneficiary can be considered a DESIGNATED beneficiary. The designated beneficiary on any IRA or qualified plan agreement is considered the beneficiary whose life expectancy is used for RMD determination for each account upon the owner’s death.

When multiple individual beneficiaries are listed, the designated beneficiary is determined as of 9/30 in the year following death. These beneficiaries must be listed by the owner prior to death, but can be eliminated by qualified disclaimers or by distributing their interest in full prior to the 9/30 date.

But there is another 3 month extension to create separate accounts. The deadline to create separate account is 12/31 of the year following the year of death. Separate accounts for each individual beneficiary allows that beneficiary to use their own life expectancy for RMDs. If the separate accounts are not set up by the deadline, the oldest beneficiary as of 9/30 is the designated beneficiary whose life expectancy must be used for RMDs for all the individual beneficiaries, and this is what Ed was referring to.

In summary, there is no reason not to name all your children as IRA beneficiaries. But they need to know that the separate accounts must be created by the end of the year following the year of your death if they are to be allowed to each use their own life expectancies. A parent that is somehow convinced that their children will misfire on the separate accounts and they differ considerably in age, could set up a separate IRA account for each child and that would avoid the separate account deadline. However, you would then have to deal with the hassle of making sure that these accounts remained equal in value if you wanted them to be equal.

Please post if you still have a question or above is not clear.

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Mort,
1. The death certificate is submitted to the IRA custodian with a request to create separate accounts. Custodians may vary in their administrative procedures somewhat, but most of them will transfer each child’s share into a newly created IRA beneficiary account. Some custodians refer to these as “BDAs”. Each child needs to immediately select their own successor beneficiary on this account, and needs to understand 3 vital requirements:
a) They must take annual RMDs
b) They can ONLY move the account by direct transfer. They CANNOT ever do an indirect rollover. This one is the source of the costliest of all IRA errors since the distribution is fully taxable and the stretch is lost.
c) The separate account must be created no later than 12/31 of the year following the year of your death.

2, 3) The IRA Custodian will file a 5498 for these accounts with a copy to each child and to the IRS. The child does not have to do anything beyond the items above.

Despite the above requirements, it is better to make sure the children understand these requirements, at least to the point where they will report the death to the IRA custodian, who can guide them from that point. Some IRA owners worry about this to the point where they create a separate IRA account for each child while they are alive and thereby eliminating the need to do this post death. But then the owner has to attempt to keep each account with the identical balance and this can become an on going hassle.

If you want to leave different amounts to the children and not have the others know this, then YOU should set up the separate accounts, and because they are different you would not have to worry about keeping the balances identical. Still no guarantee they won’t find out anyway in the end, but you won’t care at that point.

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