At least one beneficiary needs to be picked for every IRA. I recently made an IRA transfer from one trustee to another one. I was searching for an extra 0.1 percent return. I might just say that interest rates banks are paying aren’t good. (The real way I feel about it isn’t best put in writing, because it would get this blog rated as adult only.) At any rate, when I got the little girl at the new accounts desk to finally help me, she had no clue. I had to walk her through it step by step. In her words, “We don’t do a lot of IRA transfers.”

The real sticking point came with the naming of the contingent IRA beneficiary. You are actually the primary beneficiary of your IRA.Your advisor doesn’t know what an IRA is actually a 408 trust. There has to be an IRS approved trustee. Then there is a beneficiary – You. Can you see how it could be a trust? Trustees, beneficiaries, all the language sounds like a trust, but nobody ever thinks of IRAs as trusts.

I wanted my wife to be the first choice as the contingent IRA beneficiary (the one who gets the IRA when I die). The bank was ok with that, although they suggested that I use my living revocable trust as beneficiary. “If you use your trust as beneficiary, there won’t be any probate,” the girl proudly stated. I couldn’t explain to her that there wasn’t any probate with an IRA. It is already a trust!! The money is just moved automatically to the named beneficiaries’ upon my death. NO PROBATE.

I patiently explained that my wife had to be the IRA beneficiary, because she would receive the IRA and could keep the money in the tax and asset protection cocoon that the IRA offers the IRA funds. She can extend the payments from my IRA over her life expectancy, and all of the money gets to stay in the IRA environment where it grows without a tax. Growing money without a tax is a big deal. It grows a lot faster!!!!! If you name your living trust as beneficiary, then the IRA money has to be taken out of the IRA and it loses its neat tax treatment and asset protection treatment. You don’t want to have that happen. The new accounts girl never really got the concept, but gave up on her argument.

Contingent IRA Beneficiary

I then wanted to name a backup secondary IRA beneficiary. There was a little argument that I really only wanted to name my wife, because one beneficiary was really enough. I got through that argument pretty quickly by pointing out that my wife and I might be killed at the same time in an accident. Then who gets the IRA? I wanted to put “My issue per stirpes.” That means my kids get equal shares and if one of them has died then their children (my grandchildren under that child) would get their parent’s share. I can’t do that I was informed. I told her I could do that. “It is special legal language,” I informed her. She didn’t buy it.

I said let’s talk to your bank’s attorney. She went into the supervisor’s office and made a call. They were obviously having a big discussion on the phone. I decided that it was my money, I knew what I was doing, and I should talk to the bank’s lawyer. I opened the door and was told to close the door. After great deliberation they came out and said I couldn’t use the words “per stirpes”, even though the lawyer had heard of them. (YA, first year law school) They said I could list my children by name and if one died it would go to their estate. Or they suggested the living trust again.NEVER put your living trust as IRA beneficiary. The IRA can’t be “stretched” over the life time of your beneficiaries, because the trust doesn’t have a “life” the IRS can use to calculate minimum required distributions with. The kids have a “life” and their ages can be used.

By this time I was steamed, and I was running onto an hour and a half for what I had scheduled 20 minutes for. I gave up, and put the kids’ names on the paper as the IRA beneficiary. It is only a 6 month CD and believe me at the end of 6 months I am gone, or at least my IRA money is out of that bank. Don’t you love banks?

2 Comments
  1. I have a living trust and my federal credit union tells me that I can designate the trust as my beneficiary. They have a form printed for this purpose. Is this legal and a good idea?

  2. Jerry,
    If the trust is the beneficiary of an IRA then the IRA cannot be rolled over and must be distributed. If you have a person as the beneficiary of an IRA that person can stretch the IRA distribution over their lifetime and allow the IRA to continue to grow tax free.

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