Tax Consequences of Contingent Beneficiary on Qualified Annuity or IRA
My spouse and I have a Revocable Living Trust. We were recently told by an Annuity Agent that its best to ADD our children as “contingent” beneficiaries so that our heirs could stretch the taxes out 5 years. I had NOT heard this before and so I am questioning the advice. He also said that would also be true of the contingent beneficiary in my IRA and Roth IRA. I am confused because if I switch my contingent beneficiaries to my children and my wife and I die at the same time then won’t our 3 children (all over 18) have to go through probate?
Permalink Submitted by Bruce Steiner on Mon, 2013-10-07 02:14
The revocable trust has nothing to do with this. Revocable trusts are appropriate in some cases, and in some states, but for most people, in most states, are not necessary.If you’re considering naming your children as contingent beneficiaries, most likely you want to name each other as primary beneficiaries. At the surviving spouse’s death, if your children are then the beneficiaries, they’ll be able to stretch the IRA benefits over their life expectanies.If the amount involved is sufficient, you might want to provide for your children in trust rather than outright. For more on trusts as beneficiaries of retirement benefits, see my article on this subject in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal: http://www.kkwc.com/docs/AR20041209132954.pdf.You probate the Will, not the IRA benefits. In most cases, probating a Will is not particularly difficult. However, if you designate beneficiaries for your IRA, it will pass to the named beneficiaries outside the Will.
Permalink Submitted by Don Hall on Mon, 2013-10-07 03:38
OK. So if I understand your comment, In BOTH my IRA (traditional) where my wife is the primary Beneficiary and my wifes Indexed Annuity with an Income rider where I am the primary beneficiary, we should both ADD each of our childrens names spelled out as Contingent beneficiaries. Correct?But our ROTH IRAs shouldn’t we leave as the Living Trust since they will be principle and interest tax free?
Permalink Submitted by mk foss on Mon, 2013-10-07 17:08
All accounts, IRAs, Roth IRAs, annuities, life insurance should have contingent beneficiaries. The only time that one of those accounts would go through a probate proceeding is if there is no beneficiary because the primary beneficiary predeceased the owner of the account. If your children are responsible adults, naming them as contingent beneficiaries is the way to go. If you’re concerned that one or more of the children may take the benefits all at once instead of stretching them out or has creditor problems, then you’d name a trust. There are exceptions to every rule about naming beneficiaries but the most important rule is to always HAVE beneficiaries and contingent beneficiaries on all accounts that have a beneficiary.
Permalink Submitted by Bruce Steiner on Mon, 2013-10-07 20:26
Without knowing the specifics of your situation, there’s no way to say who your beneficiaries (primary or contingent) should be. However, it’s unlikely to be a good idea to run them through a revocable trust. You should discuss this with a competent trusts and estates lawyer.
Permalink Submitted by Alan - IRA critic on Tue, 2013-10-08 00:19
Note that the contingent beneficiary has no affect on the RMD distribution period if the primary beneficiary inherits the IRA. If the contingent beneficiaries inherit an IRA, they can take RMDs over their life expectancies, and that is also true of most non qualified annuities, but not all because non qualified annuities are not subject to IRA RMD rules. It is not clear what type of annuity you have here as it depends on the source of the funds.