IRA Beneficiary | Ed Slott and Company, LLC

IRA Beneficiary

Have been receiving many beneficiary update requests with spouse as primary and many paragraphs for contingent beneficiary. My custodian has no issue adopting the verbiage for contingent but find many 401k plans and other IRA custodians are wanting either a human or entity not a attached paragraph.

Most of these cases the intent is to create sub trusts for each child due to age disparity but should IRA stretch change to 10 years and there are no spend thrift provisions or specifics on accessibility of the IRA funds then I don't see what would be wrong with simply naming the clients Trust as contingent and assuming it's qualified see-through it to name each bene as their own Bene IRA.

If a trust names the clients 2 adult children as 50/50 bene but per trust language one child's portion is to go into a Special Needs Trust,, is this trust still considered a see-through Trust? All trust beneficiaries must be individuals to qualify as a see-through but always assumed this was more related to charities and not a human's portion going into a trust such as a Special Needs Trust or Spend Thrift Trust.

  • At the very least, in order to use the life expectancies of the oldest beneficiary of each sub trust, the sub trusts must be specifically listed on the IRA beneficiary clause. An SNT could be one of the listed trust beneficiaries. If only a master trust that happens to include provisions for splitting into sub trusts is named on the IRA, then the oldest beneficiary of all sub trusts would determine the RMD for all. As you indicated, if the oldest beneficiary still resulted in a stretch over 10 years, and the Secure or similar stretch restriction became law, there would be no stretch benefit resulting from treatment of each sub trust as a separate account. That said, I believe that the beneficiary of an SNT would usually be exempt from the 10 year limit. In that situation, it would probably be safer to partition the IRA into one account naming the SNT as beneficiary, and combine the others.
  • Naming 3 sub trusts created by the master trust would probably result in more custodians balking at accepting a more lengthly and complex beneficiary designation, including some that would not have a problem if just a single trust was named.

  • If an IRA custodian won't accept a customized beneficiary designation form, the IRA owner should move the IRA to a different financial institution.
  • What is a "subtrust"?
  • What is a "client's trust"?  The IRA owner can't name a trust for his/her own benefit as a beneficiary, since he/she will be dead.
  • Clients usually provide for their children in separate trusts for their benefit.  It's not for the stretch.  Unless the difference in age is substantial, the older children are usually contingent beneficiaries of the younger children's trusts (if a younger child dies without leaving any isssue and without exercising his/her power of appointment).  So the oldest child will probably be the measuring life for all of the children's trusts.
  • Are you suggesting having an administrative trust as beneficiary for convenience?  It's easier at the time of the beneficiary designation, since the financial institution only sees one beneficiary.  But it's more difficult at the time of administration, since you have to divide the single trust into trusts for each child.  We sometimes have to do that where a plan (typically a local government plan or a guild plan) won't allow multiple trusts as beneficiaries.
  • It doesn't matter if a child has special needs.  The trust for that child is similar to the trusts for the other children, and in any event the financial institution won't be concerned about its provisions.
  • It's too early to know whether the House or the Senate version of the SECURE Act will be enacted, and if so, how it will affect the planning.  At this point, I think it will result in an increase in Roth conversions.  If the stretch is limited to 5 years I think some people will name charitable remainder trusts as beneficiaries, though there's some cost, complexity and inflexibility of a charitable remainder trust as beneficiary.
  • Bruce Steiner
 

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