Successor Beneficiaries: The “Beneficiary’s Beneficiary”

By Joe Cicchinelli, IRA Technical Expert

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It is vital that IRA owners name both primary and contingent beneficiaries. Failure to have a beneficiary in place at death could result in the loss of the extended payout, that is, the stretch IRA. Why? If the IRA owner’s beneficiary dies before the IRA owner and no contingent beneficiary was ever named, the IRA owner’s estate is usually the default beneficiary. The estate does not have a life expectancy to use for stretch distributions.

Contingent (or secondary) beneficiaries inherit the IRA only when the primary beneficiary dies before the IRA owner or when all the primary beneficiaries timely disclaim the IRA. A contingent beneficiary is NOT the same as a “successor beneficiary.”

Most custodians allow a beneficiary to name a successor beneficiary. Basically, a successor beneficiary inherits the IRA if there’s any money left in it after the original beneficiary dies. Successor beneficiaries are sometimes called the “beneficiary’s beneficiary.” Unlike a contingent beneficiary, which is named by the IRA owner during his or her lifetime, a successor beneficiary is named by the beneficiary after the death of the IRA owner.

It is important for every beneficiary to name a successor beneficiary as soon as they inherit so that there will be someone named to continue the single life expectancy payout schedule if the beneficiary dies early. This applies to all non-spouse beneficiaries, or spouse beneficiaries who do not make the IRA their own IRA. Having a successor beneficiary will avoid probate and other related estate problems in the beneficiary’s estate. If the beneficiary names a successor beneficiary, the remaining IRA balance will go directly to that beneficiary with no probate, claims or other legal obstacles.

When the original beneficiary dies and the successor beneficiary inherits, it does not change the stretch period of the original beneficiary. The successor beneficiary does not get to use his or her own life expectancy, but instead uses the remaining stretch period of the original beneficiary.

Article Highlights:

• Successor beneficiaries inherit IRA funds after the original beneficiary dies
• Having a successor beneficiary avoids probate and other related estate problems at the death of the beneficiary