Multiple IRA beneficiaries with unequal percentages

Submitted by Ben Meyer on Sun, 2015-09-06 16:23

When a IRA specifies a number of beneficiaries, each with unequal percentages of the total, what happens when one of them dies before the IRA holder? When the IRA holder dies at a later date, how is the portion of the predeceased beneficiary divided up among the surviving beneficiaries? The IRA custodial agreement does not address this issue.

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Permalink Submitted by Alan - IRA critic on Mon, 2015-09-07 00:45

Benn, non indication is a flaw in the agreement. Vanguard’s beneficiary clause indicates that in this situation the decedent’s share should be divided proportionately with the remaining beneficiaries. The result would be that the relation between the unequal shares that existed before the death of the beneficiary would continue. For example, a 60-30-10 split with the decedent being the 10% share, a proportionate split would result in the 60% share adjusted to 66.667 and the 30% share to 33.333.
Elsewhere in the beneficiary clause for a different situation, the Vanguard agreement specifies “equally” which in the above example the final shares would be 65-35 as each living beneficiary would receive half of the 10% share.
For an agreement that fails to define the allocation formula, I don’t know if the solution would look to the state probate code.

Permalink Submitted by Bruce Steiner on Mon, 2015-09-07 02:45

The beneficiary designation should say what would happen if a beneficiary predeceases the IRA owner. You could specify that the share of a deceased beneficiary goes to the deceased beneficiary’s issue. Or you could say that the share of a deceased beneficiary goes to the surviving beneficiaries in proportion to their interests. Or you could make some other provision.

For clarity, using Alan’s example, it’s better to draft it as 6 equal shares to A, 3 equal shares to B and 1 equal share to C, rather than using percentages, so that it’s clear what happens if C predeceases the IRA owner (or, alternatively, if C predeceases the IRA owner without leaving any issue who survive the IRA owner).