Q: You’ve written about the importance of IRA beneficiary designation forms, and about how banks and brokers sometimes lose them. What happens if my children can't find my IRA beneficiary forms after I’m dead? Does it mean that they won’t inherit the account? –LR via email
A: Not necessarily. They may still get your IRA, depending on how your will is worded. But they'll have to empty the account and pay taxes on it much faster than they would if they’d inherited it as the designated beneficiaries.
Let’s start with the ideal: Imagine you leave a $400,000 IRA to your 40-year-old daughter, naming her on the beneficiary designation form, which you keep in your safe deposit box, attached to your will with a paperclip.
As the designated beneficiary, your daughter can stretch her annual withdrawals from the account over her 43.6 year life expectancy. (Her first required minimum withdrawal would be $9,174 -- $400,000 divided by her 43.6. life expectancy) Her withdrawals are added to her taxable income every year, but the IRA balance keeps growing untaxed. If she takes only the minimum required distributions every year and earns a decent investment return, the IRA could be worth more than $1 million by the time she's 65.
The less happy version: Your IRA beneficiary form is missing. Your estate is the default beneficiary. If your will says that your daughter inherits your estate, she still gets the IRA – but not on such favorable tax terms because your estate is the designated beneficiary, and it has no life expectancy over which to stretch distributions.
How quickly the IRA must be emptied in this case depends on your age when you died.
If you were younger than 70 and a half, the law says the IRA must be emptied within five years of your death. If you were older than 70 and a half , it must be emptied over what the IRS actuarial table says was your remaining life expectancy. (If you died at age 75, that would be 13.4 years, for example.)
Either way, your daughter gets the IRA but loses decades of untaxed investment growth.
Finally, of course, there’s the worst turn of events: You assumed your daughter would get the IRA, so your will leaves the rest of your estate to someone else – say, to your trophy second wife. Even if your daughter is named in the will, she'll have to share the IRA with her stepmother. They'll also share it if there is no will. (When you die without a will, your estate is divided between your surviving spouse and children.)
And if there's a will, but it doesn't name your daughter, the missing IRA beneficiary form could result in disinheriting her.
(c) Lynn Brenner, All Rights Reserved.