Do You Know Who Will Inherit Your IRA?
By Sarah Brenner, IRA Technical Expert
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You have contributed to your IRA for years. You have made wise and thoughtful investments. Maybe you have rolled over funds to your IRA from your company plan. You may now have a significant balance. So far, you have taken smart steps toward a secure future. Don’t stop your careful planning there. It is time to ask yourself an important question, “Who will inherit my IRA?”
While you have been saving for retirement, you may not have been thinking about what happens to your IRA after your death. For many people, however, an IRA is not only an important part of their retirement, it is also a significant part of what they will leave to their heirs. You will want to carefully consider what will happen to your IRA after your death.
Many people believe that their will determines who inherits their IRA. This is a common misconception. Your will has no effect on who will receive your IRA assets because IRAs are generally not part of the probate estate. In other words, IRAs pass to beneficiaries outside the will. Even a perfectly drafted will by an expert attorney will have no control over what happens to your IRA after your death.
The main estate planning document for IRAs is the beneficiary designation form. This form, not a will, will determine who inherits your IRA funds. This is a form that you most likely completed with the IRA custodian when you established your IRA. On a standard beneficiary designation form, an IRA owner names one or more primary beneficiaries. Additionally, the IRA owner usually will also name a contingent beneficiary. Contingent beneficiaries inherit the IRA funds if the primary beneficiaries predecease the IRA owner.
You may have established your IRA a long time ago. IRAs have been around since the 1970s and a lot has happened since then! Consider contacting the IRA custodian to see if your beneficiary designation form is up-to-date and accurately reflects your intentions. If you have divorced, you will want to be sure your ex-spouse is not still listed on the beneficiary designation form. This does happen and sometimes this oversight ends up in a court battle, as the ex-spouse claims IRA funds that the IRA owner may have wanted to go to a current spouse or to children. Avoid this legal mess by making any needed changes now.
Other problems can occur when an IRA beneficiary designation form is not clear. Are all the listed beneficiaries on your form clearly identified, along with share of the IRA to which they are entitled? Spending some time now to be sure that everything on the beneficiary designation form is accurate will avoid significant problems for your heirs in the future.
Sometimes, the IRA custodian cannot find a beneficiary designation form. This can happen for a variety of reasons, including bank mergers and takeovers. If you discover this now, the solution is easy. You can simply complete a new beneficiary form. If no beneficiary form can be found after your death, there will be more serious problems as the IRA will be treated as if no beneficiary was named and it will be paid out to the default beneficiary listed in your IRA plan (usually your estate or spouse).
Take some time now to revisit your IRA beneficiary designation form. Make sure the form is up-to-date, accurate and accessible. If you have questions, be sure to consult with an advisor who is knowledgeable about IRAs. You may consider having a custom beneficiary designation form drafted if the standard one provided by the IRA custodian is insufficient for handling your intentions. By taking these simple steps now, you will be able to confidently answer the question, “who will inherit my IRA?”
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