Beneficiary wants to name a beneficiary for IRA

[Guest Crystal]

"Mary" had an IRA and died prior to reaching age 70 1/2. She named her sister "Sally" as beneficiary. Sally began receiving proceeds from the IRA and is now in her 90's. Her health is failing and she wants to give the remainder of the IRA balance to her son upon her death instead of having it become part of her estate. Her cpa was told that because Sally is the beneficiary of the IRA, she can't name another beneficiary. Can anyone confirm this or give me an alternative to pursue? Thanks in advance!

[BPickerCPA]

A beneficiary is permitted to name a beneficiary, but the new beneficiary can only continue the same schedule as the original beneficiary. The only way Sally can still be taking distributions if she is in her 90's is if she was in her 80's when Mary died. And even then there can't be many years left. If Sally was younger than her 80's when Mary died, the IRA should have been paid out by now.

Barry

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Barry Picker, CPA/PFS, CFP

New York, NY

[John G]

BPicker, I thought of a scenario where it gets hard to pass out all the $$. If the funds were in growth stocks or even a blue chip mix, the annual growth could conceivably keep pace or exceed the pass out. For example, say the custodian was supposed to pass out 15% each of the last five years. If the investments were in an S&P500 index fund, the growth would have exceeded the pass out each year I believe. Mostly in the 20% plus range.

Not a common or even likely scenario for a senior citizen. I am assuming that the custodian would keep adjusting the payout eah year but until a much higher annual % was used, the assets would grow, would they not? I am assuming that you are always using a non-zero probability of death so there is alway a following year payout. Or, is there some terminal year when the entire IRA (regular of course) must be ultimately distributed?

[BPickerCPA]

John,

The divisor is reduced by one each year, so even if the account grows, you take out more each year.

Example: If Sally was 79 when she took her first distribution, there would be a 10 year payout. Let's assume a 25% growth, and the account was worth $100K at the first valuation date. Sally takes her distribution on the last day of the year. Sally has to take 1/10 of $100K the first year, but the account is worth $125K when she takes the distribution. Now it's worth $115K ($125-$10K) when she values the account for the second distribution, which is now 1/9 of that account. When Sally is 86, three years left in the payout, she has to take 1/3, then 1/2, then the entire account, so that when she gets to her 90s, the IRA is gone.

Barry

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Barry Picker, CPA/PFS, CFP

New York, NY

[Bruce Steiner]

Obviously the balance at her death has to go to someone.

Ignoring any issue of potential creditors, it doesn't make much difference whether she picks who she wants to leave it to by filing a beneficiary designation with the IRA custodian or by making a provision in her Will.

If she would prefer to do it by beneficiary designation, and the IRA custodian won't let her do it that way, she should move the account to a different custodian.

If anyone on this group works for an IRA custodian, you have a tremendous marketing opportunity if you can make your IRAs customer friendly.

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Bruce Steiner, attorney

(212) 986-6000 (NY office)

(201) 862-1080 (NJ office)

also admitted in FL

[Wessex]

I fail to see why any IRA custodian would accept this business -- regardless of whether or not its documents permit beneficiary designations by a beneficiary. From the information given, it appears that either RMDs have not been properly distributed, or the remainder of the account must be distributed over a very brief period of time. Adding a beneficiary at this time would not extend the period over which distributions could be made.