Naming Contingent IRA Beneficiaries Is More Important Than You Think

Q: I have a question about leaving an IRA with a renunciation clause. As I understand it, I can leave an IRA to my wife and she can choose whether to accept it, or use the renunciation clause to turn it over to our children and let them draw it down over their lifetimes. Is that right? –SB, via email

 A: Yes. Your IRA beneficiary always has the option of disclaiming part or all of the account, as long as the disclaimer is filed in court within nine months of your death.  

But for this to work as you've described, you must also have also named a contingent beneficiary – someone to inherit whatever part of the IRA is disclaimed by your primary beneficiary.

After your death, your wife can decide how much of the IRA to disclaim. If you leave a $1 million IRA, for example, she can roll $500,000 into an IRA in her own name, and disclaim the remaining half.

But she can't decide who gets the money. Whatever she formally disclaims will automatically go to the contingent beneficiaries you named on your beneficiary designation form. From a legal standpoint, this money is treated as if she had predeceased you.

If you didn't name any contingent beneficiaries, whatever is disclaimed by the primary IRA beneficiary goes to your estate, where it will be distributed according to the instructions in your will.

Of course, that doesn't mean your kids won't get the disclaimed IRA money. They can inherit it as heirs under your will -- but if they get it that way, they won't be able to stretch distributions over their own life expectancies. To do that, they must be named as your contingent IRA beneficiaries.

Please send your questions to Lynn@LynnBrennersFamilyFinance.com. I'm sorry I can't respond personally to every email. Questions are addressed only online.

(c) Lynn Brenner, All Rights Reserved.

Comments

[Betty Schneider]

In a recent AARP Magazine (with Michael Douglas on the cover), your article "Who will get your IRA" discussed the necessity of using a certain simple form to ensure maximum inheritance for IRA beneficiaries. My mother wishes to locate and use this form, but has no form name or official number for it. Has contacted her bank, who don't know what form she's referring to.
Would you kindly respond to this query, so that my elderly mom can feel at ease about the issue. Thanks so much!

[lynn brenner]

Lynn replies: Sure! Your mother should ask the bank for a new IRA Beneficiary Designation form. Every bank has its own version of this form. She should fill it out, make a couple of copies (she can keep one in her safe deposit box or give it to her lawyer, and give one to you) and give the original back to the bank for their files.

"Who'll Get Your IRA?" -- which you'll find at http://www.aarpmagazine.org/money/who-will-get-your-ira.html -- explains how to fill out the form.