Beneficiary Designation for Minor Child
Clients oftentimes name their minor children as contingent beneficiary for their retirement plans. If a minor child is specifically named as beneficiary of a retirement plan, will the Will be looked at to see who will be named Custodian/Guardian of the Inherited IRA until the child reaches the age of majority? Would it not be best to either name the Custodian/Guardian along with the child directly on the beneficiary form instead of just naming the child alone and hoping the estate will be able to appoint the proper Custodian/Guardian based on the Will? I always look at a trust as a last resort, which is why it seems to make sense to always name a Custodian/Guardian on the beneficiary form to avoid any future problems. Any recommendations on this?
Thank you!
Permalink Submitted by mk foss on Fri, 2012-08-03 17:12
When naming a minor child as a beneficiary it’s best to name someone to be the custodian under the state’s UTMA or UGMA until an age that is specified (and works in your state). If no age is specified, the minor can take all of the assets at age 18 but if the beneficiary designation provided that it wasn’t available until age 40 it wouldn’t fly with state law. The decedent’s will is not controlling – if no custoidan is named a guardian may need to be appointed to make decisions before the child is no longer a minor.
This is a case where a conduit trust works – I think they’re best fo rmaking sure that RMDs are taken and that the child doesn’t cash out the IRA as soon as they reach 18.
Permalink Submitted by Jonathan Sard on Fri, 2012-08-03 17:27
Thank you. I understand that the Will is not controlling, but if ONLY the child is named as beneficiary and there is a Will in place, does the Exectur have the power to apoint the Guardian named in the WIll to be Custodian of the Inherited IRA on behalf of the minor child, or is the Will completely irrelevant and disregarded?
Permalink Submitted by Bruce Steiner on Fri, 2012-08-03 17:48
Conduit trusts rarely make sense. If the beneficiary lives to life expectancy, which will happen 50% of the time, nothing will be left in the trust. All of the assets, which could have been kept out of the beneficiary’s estate and protected against the beneficiary’s potential creditors, will be thrown into the beneficiary’s estate, and will not be protected, or will not be as well protected, against potential creditors. It’s almost always better to give the trustees discretion.
For more on this, see my article on this subject in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal: http://www.kkwc.com/docs/AR20041209132954.pdf .
If the amount involved is too small to warrant administering a trust, then a custodian under the Uniform Transfers to Minors Act makes the most sense.