As it is with Wills, it is important that you review beneficiary designations for retirement plans, IRAs and Roth IRAs 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, it is necessary that you designate your spouse 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 who has children, be aware that if your new spouse inherits your IRA assets, those assets may eventually be distributed according to your spouse’s beneficiary designations. Therefore, your own children may not inherit your assets. In this scenario, you may consider naming your spouse and your 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 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, when John passes away, the assets will pass equally to his sons. If Cliff should predecease his father, 100% of John’s assets will go to his surviving son, Bill.
However, IRA owner John has a “per stirpes” stipulation that 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 whom the beneficiaries of the IRA should be based on the determination of who predeceased 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 contingent beneficiaries if named, or the individual’s estate if not.
The issue of simultaneous death can be addressed in a Will. You can specify whom will inherit IRA assets should it be unclear if you or your spouse 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 Henssler Financial at 770-429-9166 or experts@henssler.com.
Disclosures:
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
