IRAs and Beneficiaries

[kannon]

Good Morning -

Got an email this morning that talked about being careful on how you designate your IRA beneficiaries. Its from the TSP program so I know it's reputable.

In a simple nutshell, what I want is that all IRAs go to the surviving spouse and then after that spouse passes they go equally to all children as an Inherited IRA.

My understanding is that the Inherited IRA allows them to start taking RMDs based on their life expectancy.

The email article says:

An inherited IRA must be set up and properly titled. In particular, the deceased IRA owner's name must appear in the account title and the IRA beneficiary must be shown as an inherited beneficiary. For example, the IRA should be titled as “Christopher Jones (Deceased 11/29/2016), IRA FBO of William Jones, beneficiary. Some financial institutions are not using this proper titling. They are instead recording the IRA as an inherited IRA in their internal records. This can result in confusion and worse, may allow the IRA beneficiary to treat the IRA as his or her own IRA which it is not. Incorrect inherited IRA titling will nullify the inherited IRA and once again result in the entire account being distributed and taxable to the extent of pre-taxed funds.

All of our IRAS are in Vanguard. Double checking it shows that the beneficiaries are:

1) To the person I am married to at the time of my death

2) To my descendants who survive me, per stirpes

Am I doing this correctly?

Thanks

 

[kaneohe]

Perhaps........the beneficiary designation should make clear that there is primary beneficiary (spouse) and then contingent beneficiaries if that is what you want. Otherwise, it could sound like both groups inherit.

Also I believe that if your spouse survives you and inherits the IRA, then when she passes, that IRA passes according to the beneficiary designation for that IRA so it is important that survivor spouse update that designation after you are gone.

 

[gauss]

"what I want is that all IRAs go to the surviving spouse and then after that spouse passes they go equally to all children as an Inherited IRA."

If you are trying to control what happens to the money after your spouse passes at a later date, then I am not sure that you can control this with beneficiary designations. With after-tax assets this is where a trust could be useful.

If your only concern is a secondary beneficiary, ie if your spouse precedes you, then my comment above would not apply.

This Schwab pdf appears to layout the options on how beneficiaries can handle the IRA once the original owner has passed.

-gauss

 

[kannon]

My thought was that all IRAs pass to the surviving spouse. After that, the surviving spouse would update the beneficiaries and have all IRAs go to children as inherited IRAs. Now making assumption she doesn't do anything to the contrary, although she could remarry and buy a corvette. But you are right that outside of a trust, can't guarantee where money goes.

On another note, assuming we both go together (thinking Romeo and Juliet like), I assume the 2nd beneficiary item would move the money to the kids.

My basic question is whether the wording in the Vanguard IRA for the kids ("To my descendants who survive me, per stirpes") is acceptable - which is not want the article states.

 

[Bamaman]

Usually the spouse would be the primary beneficiary. But sometimes, both spouses can die at or around the same time.

Secondary beneficiaries are noted, there should be specific names listed and the percentages to each. For various reasons, maybe the secondary beneficiaries are not to inherit the IRA's equally.

Hopefully there will be time for the spouse to setup the previous secondary beneficiaries to be primary beneficiaries--and the percentage to each per their wishes.

 

[Dancfo]

The comments noted in the email you received can be a concern. It is more a function of how you IRA provider titles the resulting account that is the issue. It appears you wish to name your spouse as the primary beneficiary and your children as contingent beneficiaries if you spouse is deceased when you pass. The point the email is making is that it is important for the title to reflect that you were the original "owner" of the IRA, and that your name remains on the title. This especially needs to happen if someone other than your spouse is the beneficiary. A spousal beneficiary can make the IRA their "own" and it would thus not be "inherited." However, a child cannot take "ownership" of the IRA and it is important that the child is named as the "inherited" beneficiary along with the original owner's name.

The issue here is that owners, (person who funded the IRA), spousal beneficiaries, and non-spousal beneficiaries have different rights and rules regarding the IRA. Therefore, it is important for the title of the IRA to correctly identify the status of the IRA. This is especially true if the IRA provider changes, since any "internal" designation probably wouldn't be transferred to the successor provider. The account title, however, can stick with the account and provide the information needed.

If you wish to place any restrictions on the IRA (maybe, for instance, in second marriages or with spendthrift children), you may either use a trust, or the little-known "Trusteed IRA" - which basically incorporates qualified IRA language within a trust-like document. This is done with a single document without the necessity of creating a separate trust. Today, when IRA's are becoming a larger portion of people's wealth, this type of document can be useful.

 

[Fedup]

Is it better for the surviving spouse to transfer the IRA to his/her own name, or is this depends on your personal tax situation. I understand the part about titling it correctly if you are the children, but I'm not 100 % clear as the surviving spouse.

 

[gauss]

My basic question is whether the wording in the Vanguard IRA for the kids ("To my descendants who survive me, per stirpes") is acceptable - which is not want the article states.

My understanding is that the titling of the inherited IRA, which the email discusses, is not determined until after your death.

The designation of the beneficiaries and the titling of the inherited IRA would be two distinct things IMHO.

-gauss

 

[Dancfo]

Yes, as Gauss states - really two different things.

Regarding a spouse, if they are named primary beneficiary, they have an option to either assume the IRA as their "own" or to take it as an Inherited IRA. The reason for choosing one or the other would depend on the RMD rules. Usually, most spouses just assume the IRA as their own, but if the surviving spouse is younger than 59 1/2 and the deceased spouse was older, and the surviving spouse wants to start taking distributions, it would be beneficial to take it as an inherited IRA because there would be no early distribution penalty on withdrawals. Other combination of ages may favor making the IRA their "own."

 

[mamadogmamacat]

Suggest the OP read the NOLO book (cant remember the whole title) on taking money out of your IRA,401k, etc. I recently borrowed it from the library, but since I am single I paid no attention to the details for spouse and child inheritance. It has a lot of detail including several sections on what happens after you pass. There are differences depending on whether or not you have reached RMD age, have started taking distributions a whatever age or have not yet, etc. Well worth it to educate yourself rather than depend solely on a plan provider's advice, which may be too generic and therefore potentially seriously misleading for your specific situation.

 

[jazz4cash]

Yes, as Gauss states - really two different things.

+1

 

[googily]

Yes, as Gauss states - really two different things.

Regarding a spouse, if they are named primary beneficiary, they have an option to either assume the IRA as their "own" or to take it as an Inherited IRA. The reason for choosing one or the other would depend on the RMD rules. Usually, most spouses just assume the IRA as their own, but if the surviving spouse is younger than 59 1/2 and the deceased spouse was older, and the surviving spouse wants to start taking distributions, it would be beneficial to take it as an inherited IRA because there would be no early distribution penalty on withdrawals. Other combination of ages may favor making the IRA their "own."

Yes, I just took my husband's 401k as an inherited IRA, because I am only 50 and I want access to the money without penalty during the next 10 years. I am willing to take RMDs every year as the trade-off for that.

For the record, Vanguard lists the "registration" of the new inherited IRA this way:

Googily
BENEF Mr Googily

(and it has nothing to do with the naming of the beneficiaries--it gets titled when the new account is created, and in fact the name given to the account by Vanguard is "Googily - Inherited IRA.")

 

[Fedup]

Yes, I just took my husband's 401k as an inherited IRA, because I am only 50 and I want access to the money without penalty during the next 10 years. I am willing to take RMDs every year as the trade-off for that.

For the record, Vanguard lists the "registration" of the new inherited IRA this way:

Googily
BENEF Mr Googily

(and it has nothing to do with the naming of the beneficiaries--it gets titled when the new account is created, and in fact the name given to the account by Vanguard is "Googily - Inherited IRA.")

I hope when the time comes, Vanguard will be able to help my kids title the beneficiary IRA account properly. But I'm going to mention to them to take it easy and read as much as you can for at least 6 months before they do something they might regret later on.

 

[Happyras]

A consideration for IRA's beneficiary should include state and federal estate tax planning and provide for the "stretch". We did so by establishing separate IRA trusts, making them the beneficiary and allowing the trustee powers (though not revocable) to properly manage distribution for the heirs/spouse based on tax laws at the time of death. It only helps for those with assets exceeding the non-portable tax exemption limits. The trusts are non-revocable, but.....only fully funded upon death. Hard to explain in one short reply.

I am curious if others have done this approach with their own estate plans, in addition to other trusts/QTIP etc.