Contingent Beneficiaries for IRA Accounts

Properly naming beneficiaries in things like Individual Retirement Accounts (IRAs) is obviously a crucial component of all New York estate plans. One of the most common planning mistakes is failing to update these beneficiary designations. These mistakes are serious, because assets in these accounts usually transfer at death automatically–outside of the probate process.

One common concern with IRA designations involves a beneficiary dying before you do. What happens if the beneficiary is deceased when the account holder (owner) dies?

If a contingent beneficiary is not named and the primary beneficiary is not alive, then the IRA may go to the account holder’s estate. This can have serious adverse consequences, because the estate cannot “extend” the life of the account which will result in significant probate costs and potential tax-free growth lost. For planning purposes it is often the worst case scenario.

There is one way to get around this: naming a contingent beneficiary. The basic idea is that these secondary beneficiaries receive the funds if the primary beneficiary dies first or disclaims the assets. Virtually all IRA custodians allow the naming of these alternative individuals as a precaution. For tax an inheritance purposes, it is crucial for beneficiaries to understand the situation so that after-death estate planning and disclaimer opportunities are considered.

These after-death planning issues include determining whether the beneficiary decides to receive the entire balance immediately or defer it. There are significant tax consequences in these decisions. In most cases it is best to allow the IRA to grow as much as possible to prolong the period of tax-deferred growth. The specific rules about deferring generally depends on who receives the IRA. Differing options exist depending on if the beneficiary is an estate, spouse, non-spouse, and if there are multiple beneficiaries.

No matter what, New York CIty estate planning lawyers continue to advise that beneficiary designations be updated after all major life events. The obvious events include divorce, marriage, or new additions to the family (children or grandchildren). It is important not to forget, however, that updating plans may not be as simple as just changing a beneficiary name when divorced or married. Instead, the account must be balanced with other inheritance and tax issues. Perhaps the IRA to one will off-set something given to another. But no matter what, the potential tax consequences must be considered so that the final dispensation is exactly as desired.

Be sure to receive tailored professional advice when working through these and similar issues.

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