There is No Beneficiary on the Retirement Account: Now What?

By Beverly DeVeny, IRA Technical Expert

Follow Me on Twitter: @BevIRAEdSlott

An IRA account owner or beneficiary died and there was no named beneficiary for the account. The obvious question comes, “Who inherits the account and how do you calculate the required distribution?”

This is a popular question we received by many people in December 2013. Some of the cases in question included situations where Dad died, Mom was the named beneficiary, BUT she died without naming her own beneficiary. Others included Mom as the beneficiary of Dad’s account, BUT she predeceased Dad.

If you are in one of these situations, you must first look at the IRA agreement – the “rules” for that specific IRA. Each IRA custodian has its own agreement. In this agreement, the default language will indicate who inherits the IRA when there is no beneficiary named on the form or there is no form at all.

Sometimes it will be clean and simple with the spouse as the default beneficiary. You might even get luckier and have a second default as the children. But, sadly, that luck didn’t play out for any of the individuals I talked to in December. Those IRA agreements all defaulted to the estate of the account owner or the beneficiary.

And when the estate is the inheritor, you do NOT have what the IRS calls a “designated” beneficiary. A designated beneficiary is a living, breathing beneficiary who can stretch distributions over their own life expectancy. The estate is obviously not living. It does not have a life expectancy. It’s ability to stretch distributions is limited.

So, if you inherit the IRA through the estate, you cannot use your own life expectancy to calculate required distributions. If the IRA owner died before April 1 (his/her required beginning date) of the year after he or she turned 70 ½, you must empty the IRA in five years. If he or she died after the April 1 required beginning date, then you can stretch distributions over the ACCOUNT OWNER’S remaining life expectancy.

However, the ability to stretch distributions when the estate is the beneficiary may not be an option for you. Many IRA custodians will only make payments to the estate NOT to the beneficiaries of the estate. While IRS allows an estate to assign or transfer the IRA out of the estate to a properly titled inherited IRA for estate beneficiaries, many IRA custodians will not do this, instead paying the entire IRA balance to the estate. This is a taxable distribution and cannot be undone.

This entire complex situation is avoidable. We say it over and over again. Check your beneficiary forms! If you can’t find them, simply fill out a new form and send it in. A form found on your desk after your death will not count. And don’t just name a primary beneficiary. Name contingent beneficiaries as well. Many times, this simple step will save the stretch IRA. Then take it one step further. Make sure your parents or your children or other family members do the same thing for their IRAs. Don’t let your retirement funds go down the drain.

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