Should You Make a Child Your IRA Beneficiary? If you do, there are some "minor concerns" to keep in mind. Provided by Major League Investments, Inc.Should you make a minor child the primary beneficiary of your IRA? Are there any caveats to thatchoice?IRA owners frequently name young children as contingent beneficiaries of their accounts, butdesignating someone younger than 18 as the primary beneficiary of IRA assets invites a number ofquestions.Will you exploit the stretch IRA strategy? Some parents name a child or grandchild as an IRAbeneficiary because it just seems like a good thing to do ... without realizing that it could be one ofthe greatest things they could do to promote lifetime wealth for that person.If you have plenty of retirement funds apart from your IRA, you may want to consider making yourIRA a vehicle to provide for your heirs. The stretch IRA strategy could be a gateway to decades oftax-deferred growth for those IRA assets.When owners of traditional or Roth IRAs die, their beneficiaries have three choices. They can eithera) withdraw the money as a taxable lump sum, b) create their own inherited IRA that must beemptied within five years of the original IRA owners death, or c) leave the IRA in the name of thedeceased owner, and then begin taking Required Minimum Distributions based upon thebeneficiarys age. In this way, RMDs may be stretched over an heirs lifetime, and the remaininginvested assets retain their potential for tax-deferred growth.1,2This last option is the core of the stretch IRA strategy. If the IRA custodian allows, the IRA beneficiarycan designate a second-generation beneficiary, the second-generation beneficiary can designate athird-generation beneficiary, and so forth. As long as RMDs are properly made by the beneficiaries,the IRA assets can keep growing, perhaps for generations.The stretch IRA strategy is relatively flexible. In most instances, a non-spousal IRA beneficiary canelect to quit stretching the assets at any time by taking the whole remaining balance of the inheritedIRA as a distribution. (Some IRA inheritors do run into situations where they need to withdraw more
than their RMD.)3What if multiple children are named as primary IRA beneficiaries? This is entirely permissible. Ifthat is the case, then all of their RMDs will be calculated based on the age of the oldest child.Alternately, if the inherited IRA is split into separate inherited IRAs by December 31st of the yearafter your death, then each of your children may use their own life expectancy to calculate RMDs. 4,5What if a minor child inherits an IRA? If the IRA has more than a few thousand dollars in it, then oneof two responses may be necessary. If one or both parents are still alive, then they will need topetition a probate court to be appointed guardians of the money. If the childs parents are deceased,then the probate court may appoint a guardian. If you dont want to risk any of this happening, youhave the authority to appoint a custodian for the IRA per the federal Uniform Transfers to MinorsAct (UTMA), which 48 of 50 states recognize. This adult custodian can be named as the IRAbeneficiary and will gain the authority to manage the IRA assets.1,5Keep in mind that the child is free to control and potentially liquidate that IRA at age 18 or 21 (itvaries per state and whether or not a custodian has been appointed as an IRA beneficiary).1,6Should you set up a family IRA trust? If you want more control, instead of naming a child as theprimary beneficiary of your IRA, you could a) name a qualified see-through trust as the primary IRAbeneficiary and b) name the child as the primary beneficiary of that trust.When you pass away, a) the balance in your IRA is then transferred to an inherited IRA, b) RMDs arepaid from the IRA into the trust, and then c) payments are made to the trust beneficiary. This way,you can see that the IRA account balance is paid out over an extended number of years, lesseningthe risk of the child spending the money all at once. If a trust is designated as a primary IRAbeneficiary, the resulting RMDs will be based on the life expectancy of the oldest trust beneficiaryminus one year.1,2,4There is a definite downside to this. The trust beneficiary (your child) cant subsequently roll overthe trust assets into an IRA and name his or her own beneficiaries. So this is basically "the end of thetrail" for a stretch IRA strategy. The payments out of the trust to the trust beneficiary are fullytaxable, presuming they are simply passed through the trust to the beneficiary. 2Who would oversee such a trust if the childs parents die? A family IRA trust should name asuccessor trustee. Assuming a parent is named as trustee, the successor trustee (commonly ayounger, financially literate relative) can become the trustee. If a bank, trust company or attorney isthe named trustee, they will name a successor trustee. There is nothing preventing a custodianappointed as a trust beneficiary per UTMA from being named as a successor trustee. 1,7How will the RMDs be handled? Again, the named primary beneficiary has three options: a lumpsum payout (fully taxable), RMDs based on life expectancy (the stretch IRA option), or creating theirown inherited IRA that must be emptied within five years of the original IRA owners death (anoption available if the original IRA owner passes away prior to age 70½).7
Assuming the stretch IRA strategy is chosen by the beneficiary, the younger the primary beneficiaryis, the smaller the RMDs will be (per the relevant IRS life expectancy tables).If you have not created a family IRA trust, then the primary beneficiary of your IRA will have fullcontrol of the IRA assets after your death. It is entirely up to the primary beneficiary to choose orreject a stretch IRA option.7What if you are unsure about naming a minor child as a contingent IRA beneficiary? You could optto incorporate a disclaimer provision into your beneficiary designations. This will allow the primarybeneficiary of the IRA (presumably, your spouse) the option to disclaim his or her interest in theassets, so that they may be claimed by one or more contingent beneficiaries. In this way, you giveyour spouse (or whoever is the primary beneficiary) a chance to reconsider the initial vision for theinheritance of the IRA assets.8Lastly, if you name a minor child as your primary IRA beneficiary, you should strive to see that he orshe gets professional guidance for the invested assets and that the IRA is administered properly overthe years.Major League Investments, Inc. may be reached at 978-740-1011 or email@example.comThis material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. Allinformation is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investinginvolves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professionalservices. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed asinvestment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation norrecommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanagedand are not illustrative of any particular investment.Citations.1 - www.nolo.com/legal-encyclopedia/naming-non-spouse-beneficiary-retirement-accounts.html [2/6/13]2 - www.forbes.com/sites/advisor/2011/06/28/7-mistakes-with-stretch-iras/ [6/28/11]3 - www.investopedia.com/articles/retirement/04/070704.asp#axzz2KALy628B [6/22/10]4 - www.theslottreport.com/2012/04/minor-beneficiaries-q-and.html [4/11/12]5 - fa.smithbarney.com/public/projectfiles/9ecae891-2c7b-4eef-985f-b65412c55589.pdf [9/10]6 - smith-condeni.com/index.php?option=com_content&view=article&id=74&Itemid=5 [1/31/13]7 - www.tomboumanlaw.com/IRA_Protection_Trusts_-_FAQ.pdf [2/7/13]8 - www.investopedia.com/articles/retirement/03/041603.asp#axzz2KALy628B [7/20/11] Major League Investments, Inc. 530 Loring Ave Suite 302, Salem, MA 01970 Phone: 978-740-1011 firstname.lastname@example.orgIRS Circular 230 Disclaimer: To ensure compliance with IRS Circular 230, any U.S. federal tax advice provided in thiscommunication is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for thepurpose of avoiding tax penalties that may be imposed non the recipient or any other taxpayer, or (ii) in promoting,marketing, or recommending to another party a partnership or other entity, investment, arrangement or other transactionaddressed herein.