The Deceased Don’t Make Good IRA Beneficiaries

By Joe Cicchinelli, IRA Technical Expert
Follow Me on Twitter: @JoeCiccEdSlott

Almost all IRA owners named their IRA beneficiary when they first opened the account. In many cases, it was their spouse or parent. An IRS private letter ruling (PLR) is a good case study on what can happen when you don’t update your IRA beneficiary form after the death of the original beneficiary.

In one PLR last year, an IRA owner we’ll call Steve died before his required beginning date (RBD) in 2011 with his dad named as the beneficiary of his IRA. However, his dad had died 19 years earlier and Steve never updated his IRA beneficiary form. Steve also had not named a contingent beneficiary. So, when Steve died there was no named beneficiary; therefore the IRA custodian’s default beneficiary dictated who would get his IRA (Steve’s estate in this case).

Steve’s will named his wife Kim as his personal representative and sole beneficiary of his estate assets. Kim wanted to transfer all of Steve’s estate assets to herself, including the IRA. She wanted to do a spousal rollover of the IRA to her own IRA, but there was a problem. Steve’s estate, not Kim directly, was the IRA beneficiary. Because Steve died before his RBD, the estate would be stuck having to take IRA distributions over only five years, an extremely costly result from a tax perspective.

So Kim applied to the IRS for permission to do a spousal rollover through the estate to an IRA in her own name so she wouldn’t be stuck using the five-year rule and could take required distributions when she turned age 70 ½. The IRS allowed the spousal rollover because she was the sole beneficiary of Steve’s estate with the ability to control all of the estate assets as she pleased.

So, everything turned out okay, right? Not really. She had to pay the IRS $10,000 for the PLR, plus professional fees for a CPA or lawyer to draft the PLR. This was an expensive mistake that could have been avoided if Steve had simply updated his beneficiary form after his dad died – or even better, when he got married. Additionally, if Steve had named a contingent beneficiary, the estate would not have been the beneficiary and the PLR would not have been necessary. Leaving dead relatives as your IRA beneficiary is a bad idea, especially if you haven’t named contingent beneficiaries. Always update your IRA beneficiary form after the primary beneficiary dies, and always have a contingent beneficiary named.