In this article, we will discuss the importance of updating beneficiary designations for retirement plans, such as IRAs and Roth IRAs. Similar to Wills, it is important that you review IRA beneficiary designations every few years to make sure they are in accordance with your wishes. Some events that would warrant a review of beneficiary designations are:
Marriage/Remarriage
To ensure that your spouse receives a portion of your IRA assets, you will need to designate him or her as a beneficiary. Unlike a Will, IRA plans are not governed by stipulations. If you have designated a person other than your spouse as beneficiary, that person will receive the assets accordingly. If you marry someone with children, be aware that if your new spouse inherits your IRA assets, the assets will, in turn, be distributed according to their beneficiary designations. Therefore, your own children may not inherit your assets. In this instance, you may want to name your spouse and children as primary beneficiaries.
Divorce
If a marriage is dissolved, you may no longer want to leave your IRA assets to your former spouse. Unlike a Will, a divorce will not prevent your former spouse from inheriting the assets if named as your beneficiary; therefore, you must change the beneficiary designation immediately.
Children
With the birth or adoption of a child or additional children, you may want to revise your beneficiary designations to include all children. You may also wish to include any stepchildren from a new marriage.
Death
If a primary beneficiary predeceases you, assets will automatically pass to any contingent beneficiaries listed, unless you designate a new primary beneficiary.
IRA Beneficiary Designations
There are two types of beneficiary designations for an IRA plan — Primary and Contingent. Primary beneficiaries are the first recipients of funds from an IRA, while contingent beneficiaries are secondary recipients who only receive funds if there are no surviving primary beneficiaries. An IRA owner may designate multiple beneficiaries and split up the assets in varying percentages, as preferred. For example, an IRA owner can name a spouse as sole primary beneficiary (100%) and their four children as contingent beneficiaries (25% each), or a spouse and a sibling as primary beneficiaries (50% each) and three children as the contingent beneficiaries (33.33%, 33.33% and 33.34%).
In the event that a beneficiary is not designated, the default option becomes the owner's estate. Special provisions can also be made with regard to how beneficiaries are designated:
Per Stirpes Beneficiary Provisions
A "per stirpes" provision stipulates that, should a beneficiary predecease the IRA owner, the beneficiary's share will be divided equally among his or her heirs. If you do not have this provision in your IRA contract, the assets will be shared equally among the surviving primary or contingent beneficiaries.
For example: IRA owner John Smith leaves his assets to his two sons, Bill and Cliff. Ordinarily, should John pass away, the assets will pass equally to his sons. If Cliff should predecease his father, then 100% of John's assets will go to his surviving son, Bill.
However, IRA owner John has a "per stirpes" stipulation which states that should either son pass away, that son's share of the assets shall pass equally to his children. Therefore, if Cliff should predecease his father, Cliff's children will share 50% of John's IRA assets equally, while John's son, Bill, receives the remaining 50%.
Simultaneous Death Provisions
In some states, if both spouses die at the same time in a common tragedy, state law decides who the beneficiaries of the IRA will be, based on the determination of who predeceases the other. The Uniform Simultaneous Death Act enacted in 1991 and amended in 1993, provides that "when there is not sufficient evidence that two individuals died otherwise than simultaneously, each individual's property is distributed as if he or she survived the other." The act has been further expanded to state that individuals who die within 120 hours of each other shall be deemed to have predeceased each other. Therefore, assets will pass to the individual's secondary beneficiaries if named or the individual's estate if not.
The issue of simultaneous death can be addressed in a Will so that there is a clear specification as to who will inherit IRA assets should it be unclear who dies first.
Updating IRA Beneficiary Designations
IRA beneficiaries can be updated using forms from the custodian where the IRA accounts are held or through customized beneficiary forms. Customizing your beneficiary forms allows you to be more detailed and specific about how you want your assets to be distributed. For more information or additional options, speak to your estate-planning lawyer or contact The Henssler Financial Group at 770-429-9166 or comments@henssler.com.
