Funds in your IRAs pass outside of your will and are distributed according to beneficiary-designation forms that you fill out when you open the accounts. But unlike wills that provide details on how property should be distributed, these forms generally require that account owners name a primary and a secondary beneficiary.
Other than that, the custodial institution’s policy, not your objectives, will determine how funds get paid out to your heirs. Therefore, what could be your largest financial asset is covered only by a simple, one-page document that may not come close to expressing your intentions about who should inherit the retirement funds you worked so hard to acquire.
Suppose you are single with three grown children (Manny, Moe, Jack). You named each an equal beneficiary on your $1 million IRA. Manny dies. Shortly thereafter, you die. The custodian’s policy is that Moe and Jack will inherit Manny’s share. But maybe that’s not what you wanted. You wanted Manny’s six children to get their father’s share.
An IRA Asset Will could have prevented that from happening in that it gives IRA owners the ability to spell out in greater detail what they want to become of their accounts. They can also specify the rights of beneficiaries. For instance, they could include stipulations that beneficiaries will be able to remove more than the minimum required distributions, transfer money to another institution, or divide an account left to several co-beneficiaries as a way to expand the stretch.
Most attorneys can prepare the form.
After the document is completed, you need to submit it to the custodian for signature. A number, however, will not unconditionally accept the forms. Some may request a disclaimer promising not to hold them responsible. Others may allow it, but only if the document does not conflict with the terms of their custodial agreement. Often, though, it depends on how persuasive you are and the size of the account.
Here is another potential problem. Some qualified plan custodians may have a forced payoff schedule. A “qualified” plan is a plan through your employer (401(k), profit sharing, pension, defined benefit, etc). If you have money with an employer’s plan and you actually start to read the fine print, it might say to the effect that “we don’t care who you leave your money to and what age they are, we are going to pay all the money out within five years regardless of the IRS rules that allow for distribution stretching.” Although this is not always the case, it does occur sometimes. Typically, the plan’s restrictions affect only non-spouse beneficiaries, because your spouse can always roll over your qualified plan money into his or her own IRA and have other options. But before you forget about this paragraph because you have named your spouse as beneficiary, consider what happens if your spouse predeceases you. Then your primary beneficiary may be a non-spouse and the nice benefit of stretching your retirement money over a lifetime could be lost. The solution? Don’t leave money in your ex-employers plan—roll it to an IRA (there’s one downside to this that we’ll cover when we talk about credit and bankruptcy issues).
Here is a checklist of questions you can take to your IRA custodian. These are important questions that potentially affect the way your money will get passed on to your children and grandchildren. Don’t expect the clerks to be able to answer these questions or even understand the questions. You want to get answers from the home office from the specialist that runs the retirement plans department.