Practical Issues When an IRA Owner Dies

When someone in your family passes away, there are a million things going through your mind — from grieving for their loss to arranging their funeral. One thing that may not immediately go through your head is handling their finances. If an IRA owner dies, complicated (and costly) legal issues can arise, adding more stress to an already painful situation. In order to prevent these issues, it is up to the IRA owner and his or her financial advisor to take the proper steps in protecting that legacy.

Practical Issues When an IRA Owner Dies

Year-of-Death Distributions

• If the IRA owner had been taking out required minimum distributions (RMDs), the IRA beneficiary will have take an RMD for the year of death.
• This requires the advisor to ensure the custodian of the account distributes the proper RMD to the beneficiary.
• The entire process involves taking unpaid RMDs, transferring the IRA to the beneficiary’s IRA, and naming new successor beneficiary of that account, should that person pass away.
• If this is not done before the beneficiary passes away, the chance for the IRA to be stretched to future generations can be lost.

Default Beneficiaries

• Many major financial firms have default beneficiaries included in their IRA adoption agreements, so if a person dies without naming a beneficiary for their IRA, a default person, such as a spouse, is chosen — but that may not be whom the IRA owner would have wanted the IRA to go to.
• A person may also forget to name a beneficiary due to mental or physical incapacity, which is when an advisor should suggest assigning a power of attorney to make financial decisions in the person’s stead.
• These issues can be avoided as long as a financial advisor ensures proper beneficiaries are named.

Trust Issues

• Many IRA’s are now being put into trusts at the time the owner passes away, but this is only beneficial when proper beneficiaries are named.
• When setting up a trust, it is important to list out all possibly beneficiaries — spouses, children, etc.
• If not, all the time, effort, and money spent setting up the trust will be for nothing since the value to stretch the IRA will be lost.

Minor Beneficiaries

• Some financial firms will not pay IRA money to beneficiaries who are technically minors, such as children or grandchildren.
• This issue can be avoided by using language that explains that a custodian can be named to handle the money until the beneficiary comes of age, usually 18, 21, or 25.

Most IRA beneficiary issues can avoided with the help of a skilled financial advisor. At American Investment Planners LLC, we make it a priority to help you prepare for the best financial future possible. From managing your cash to estate planning, we’re here to help with anything you may need. To schedule an appointment with one of our advisors, please call (516) 932-5130 or email info@americaninvestmentplanners.com.