Naming a minor child as the primary beneficiary of an IRA comes with some considerations. While it allows for stretching out required minimum distributions over the child's lifetime, potentially providing decades of tax-deferred growth, it requires appointing a guardian or custodian to manage the IRA funds until the child reaches adulthood. Alternatively, a trust can be named as the primary beneficiary to provide more control over distributions, but it limits the ability to continue stretching out the IRA over generations. Overall there are pros and cons to each approach that depend on an individual's specific situation and goals.

1. 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 that
choice?
IRA owners frequently name young children as contingent beneficiaries of their accounts, but
designating someone younger than 18 as the primary beneficiary of IRA assets invites a number of
questions.
Will you exploit the stretch IRA strategy? Some parents name a child or grandchild as an IRA
beneficiary because it just seems like a good thing to do ... without realizing that it could be one of
the 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 your
IRA a vehicle to provide for your heirs. The stretch IRA strategy could be a gateway to decades of
tax-deferred growth for those IRA assets.
When owners of traditional or Roth IRAs die, their beneficiaries have three choices. They can either
a) withdraw the money as a taxable lump sum, b) create their own inherited IRA that must be
emptied within five years of the original IRA owner's death, or c) leave the IRA in the name of the
deceased owner, and then begin taking Required Minimum Distributions based upon the
beneficiary's age. In this way, RMDs may be stretched over an heir's lifetime, and the remaining
invested assets retain their potential for tax-deferred growth.1,2
This last option is the core of the stretch IRA strategy. If the IRA custodian allows, the IRA beneficiary
can designate a second-generation beneficiary, the second-generation beneficiary can designate a
third-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 can
elect to quit stretching the assets at any time by taking the whole remaining balance of the inherited
IRA as a distribution. (Some IRA inheritors do run into situations where they need to withdraw more

2. than their RMD.)3
What if multiple children are named as primary IRA beneficiaries? This is entirely permissible. If
that 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 year
after your death, then each of your children may use their own life expectancy to calculate RMDs. 4,5
What if a minor child inherits an IRA? If the IRA has more than a few thousand dollars in it, then one
of two responses may be necessary. If one or both parents are still alive, then they will need to
petition a probate court to be appointed guardians of the money. If the child's parents are deceased,
then the probate court may appoint a guardian. If you don't want to risk any of this happening, you
have the authority to appoint a custodian for the IRA per the federal Uniform Transfers to Minors
Act (UTMA), which 48 of 50 states recognize. This adult custodian can be named as the IRA
beneficiary and will gain the authority to manage the IRA assets.1,5
Keep in mind that the child is free to control and potentially liquidate that IRA at age 18 or 21 (it
varies per state and whether or not a custodian has been appointed as an IRA beneficiary).1,6
Should you set up a family IRA trust? If you want more control, instead of naming a child as the
primary beneficiary of your IRA, you could a) name a qualified see-through trust as the primary IRA
beneficiary 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 are
paid 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, lessening
the risk of the child spending the money all at once. If a trust is designated as a primary IRA
beneficiary, the resulting RMDs will be based on the life expectancy of the oldest trust beneficiary
minus one year.1,2,4
There is a definite downside to this. The trust beneficiary (your child) can't subsequently roll over
the trust assets into an IRA and name his or her own beneficiaries. So this is basically "the end of the
trail" for a stretch IRA strategy. The payments out of the trust to the trust beneficiary are fully
taxable, presuming they are simply passed through the trust to the beneficiary. 2
Who would oversee such a trust if the child's parents die? A family IRA trust should name a
successor trustee. Assuming a parent is named as trustee, the successor trustee (commonly a
younger, financially literate relative) can become the trustee. If a bank, trust company or attorney is
the named trustee, they will name a successor trustee. There is nothing preventing a custodian
appointed as a trust beneficiary per UTMA from being named as a successor trustee. 1,7
How will the RMDs be handled? Again, the named primary beneficiary has three options: a lump
sum payout (fully taxable), RMDs based on life expectancy (the stretch IRA option), or creating their
own inherited IRA that must be emptied within five years of the original IRA owner's death (an
option available if the original IRA owner passes away prior to age 70½).7

3. Assuming the stretch IRA strategy is chosen by the beneficiary, the younger the primary beneficiary
is, 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 full
control of the IRA assets after your death. It is entirely up to the primary beneficiary to choose or
reject a stretch IRA option.7
What if you are unsure about naming a minor child as a contingent IRA beneficiary? You could opt
to incorporate a disclaimer provision into your beneficiary designations. This will allow the primary
beneficiary of the IRA (presumably, your spouse) the option to disclaim his or her interest in the
assets, so that they may be claimed by one or more contingent beneficiaries. In this way, you give
your spouse (or whoever is the primary beneficiary) a chance to reconsider the initial vision for the
inheritance of the IRA assets.8
Lastly, if you name a minor child as your primary IRA beneficiary, you should strive to see that he or
she gets professional guidance for the invested assets and that the IRA is administered properly over
the years.
Major League Investments, Inc. may be reached at 978-740-1011 or michael.finer@majorleagueinvest.com.
www.majorleagueinvest.com
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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
michael.finer@majorleagueinvest.com
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