Completing IRA Beneficiary Designation Forms

Answer: Some of the most costly estate planning mistakes we hear about involve IRA’s. For every IRA you should complete a beneficiary designation form. Keep a copy of the form(s) among your important papers. Do not rely on the financial institution to keep copies. For many older IRA’s the financial institutions have lost or destroyed the beneficiary designation forms. The IRS places the burden on the tax payer to prove that there was a beneficiary of the IRA, not the financial institution.

It is best to name an individual or a trust that can accept the IRA as a beneficiary. A trust must be property drafted and meet certain requirements set by the IRS in order to be accept the IRA distribution. An experienced estate planning attorney should prepare this trust. Never name a minor as a beneficiary of an IRA.  Instead, name the trust for the minor’s benefit as the beneficiary.

Another thing you should never do is name your estate as the beneficiary. If the account is a Roth IRA, all funds must be withdrawn within five years. For a traditional IRA the same rule applies unless the deceased owner was already 70½. In that case, the distribution rate is based on the projected life expectancy of the deceased owner as calculated by the IRS. This would significantly accelerate the distributions compared to naming a younger person or a spouse as a beneficiary.

The best way to fill out the form will depend on your goals. Below are some options:

Provide for your spouse. Most married couples would typically name the spouse as the primary beneficiary of an IRA. This is because a surviving spouse has an option that nobody else has: rolling over inherited IRA assets into their own IRA and treating these assets as if they were their own.

Maximize the stretch-out. Generally, non-spouse beneficiaries take the IRA as an Inherited IRA and must withdraw a minimum amount each year, starting on Dec. 31 of the year after they inherit the account.  The beneficiaries can chose to take these minimum required distributions over their own expected life spans. This is known as the stretch-out. Stretching out the IRA gives the funds extra years and potentially decades of income-tax-deferred growth. If you name your child as a beneficiary, the value of the IRA can increase to seven times its original value over the life of your child, for grandchildren the value of the IRA can increase to thirty times its original value over the lives of your grandchildren.

Keep things even among the beneficiaries. If you want your three children to have equal shares of your IRA, you would list each of them on the beneficiary form and indicate that they should get one third of the account. If one of your children predeceases you, many beneficiary forms let you provide for per stirpes distributions; that is the term for passing inheritances to the predeceased beneficiary’s surviving children, rather than automatically having that beneficiary’s share go to other surviving beneficiaries.

If you are unsure about the best way to complete the beneficiary forms, you should consult with an estate planning attorney who can advise you on the issues involved with retirement accounts.