Beneficiary question

[Belgarath]

I've searched some prior threads, and some of them come close, but don't directly answer my question.

Suppose the IRA owner dies. Spouse is beneficiary, and their daughter is contingent beneficiary. Spouse does not want to roll the proceeds to her own IRA, as this will restrict her ability to withdraw funds without incurring a 10% penalty.

However, she wants to be able to change the contingent beneficiary listed in deceased husband's IRA. Say she gets remarried, for example - she wants funds to go to new husband - not the daughter.

Can she do this? While one part of me thinks that as long as the IRA is maintained in the husband's name, no one can alter a beneficiary designation, it also seems that as primary beneficiary, since she has the right to withdraw the funds at any time, she should be able to name anyone she wants.

Who controls - current bene or the husband's previous and recorded designations?

Thanks!

[Appleby]

Current beneficiary controls. As long as the IRA owner predeceases the primary beneficiary, the contingent beneficiary is not factored into the equation (except if the primary disclaims the assets). Most IRA plan documents are written to allow the beneficiary to be treated as the IRA owner for all purposes, except the right to make IRA contributions to the account. Therefore, even through the IRA will be maintained as an inherited IRA (in the name of the deceased and the beneficiary, using the TIN of the beneficiary) the beneficiary may designate any party he/she chooses as the successor beneficiary …barring any customized beneficiary designation or other legal stipulation by the deceased requiring otherwise.

[Appleby]

…by the way…after she reaches age 59 ½, she can rollover ( or transfer if she is the sole primary beneficiary) the assets to her own IRA.

[Belgarath]

Thank you for the responses. But apparently, there are some situations where this doesn't work. I just spoke to the claims department of an insurance company involved in this question. They said that some of their annuities used for funding IRA's do NOT allow the surviving spouse, in this situation, to name a new beneficiary. But most of the newer ones DO allow this option.

Could this be possible with mutual funds as well? In other words, perhaps it is not a matter of law, but the controlling language in the IRA document - so that Merrill Lynch could allow it and Vanguard would not, etc.?

[Appleby]

Possibly. For instance, before the famous PLR issued in 2000 ( I think) that allowed a first generation beneficiary to designate a successor beneficiary, many – if not all – IRA plan documents required the estate of the first generation beneficiary, to be the beneficiary of the inherited IRA . After the PLR was issued, many changed their IRA plan document to allow the first generation beneficiary to designate a successor beneficiary. I am not familiar with insurance programs and annuities such as Individual Retirement Annuities, - but from the little I know, they are sometimes not as flexible as Individual Retirement Accounts and may place certain restrictions on the beneficiary that are usually placed on the beneficiary of an Individual Retirement Account.

If the account is with a Mutual Fund Company, chances are the document will allow what the client wants to accomplish, but as you indicated, the document rules ...assuming the document does not allow her to designate a beneficiary of her choice, she still has the option to do so when she reaches age 59 ½ , when she can rollover the balance to her own IRA.

[Belgarath]

Great. Thank you very much!

[GBurns]

Belgarath,

The IRA is a different item from the underlying investment, which is why you will have the IRA agreement or Plan Document plus an insurance policy (annuity).There is usually a difference between the beneficiary of the IRA and the beneficiary of the underlying investments, in this case, the annuity, usually because they each have their own separate beneficiary designation section. The insurance company employee to whom you spoke might not (1) have sufficient knowledge to have given a valid answer or (2) might not have been aware that there might very well be 2 different documents with 2 different beneficiaries.

[mbozek]

The terms of the IRA is a legally binding contract which spells out the rights of the IRA owner and the custodian or ins co. Almost IRAs (and all the custodial IRAs sponsored by brokerages and mutual funds that I have reviewed) provide that at the death of the IRA owner, all rights of the owner under the IRA are transferred to the beneficiary, including the right to make investment decisions, distributions and beneficiary designations. There are no separate ownership or transfer rights to the IRA investments. IRA annuities may restrict changing a beneficiary designation because the contract approved by the state Ins. dept did not permit a subsquent change of beneficary after the death of the owner.