From your savings and checking accounts to your 401(k) at work, to your taxable investment accounts, nearly every financial or savings vehicle you have is going to require you to name beneficiaries for the account. Here are some considerations for when you need to do so for your self-directed IRA.
Other Estate Planning Vehicles. The first thing to consider is what other estate planning techniques and accounts are you making use of. Consider not only things such as life insurance and trusts, but also beneficiary designations you may have on your investment accounts. If you own real estate, is it held individually, or as joint tenants with right of survivorship? Depending on your other financial assets, you may find that certain individuals or family members are adequately provided for, and that you can use your self-directed IRA beneficiary designations to benefit other individuals.
The Investments in Your IRA. Another consideration is the composition of investments in your self-directed IRA. For example, if your account includes a piece of real estate that you want to be passed to a particular individual, then you may need to set up a separate account for that asset. If your account contains no such assets, and you simply want your account to be divided by value to your beneficiaries, then a single account will suffice.
Spousal Heirs vs. Non-Spousal Heirs. In general, leaving a self-directed IRA to your spouse generally provides your spouse with much greater value than leaving the same account to a non-spousal heir. Spousal heirs can generally treat the self-directed IRA as their own, which allows them to continue the tax-advantaged status of the account. Non-spousal heirs must generally begin withdrawing from the account, and paying applicable taxes, within a relatively short time frame after your passing.
If you are earmarking accounts and investment assets to a range of heirs, consider designating all or a higher percentage of your self-directed IRA to your spouse, and using other estate planning tools for non-spousal heirs.
Don’t Forget Contingent Beneficiaries. While the issue of contingent beneficiaries is an issue for virtually all estate planning matters, it can be particularly important for self-directed IRAs. It’s important to review and update your beneficiary designations from time to time, and consider what you would want to happen if one of your named beneficiaries predeceases you.
In general, unless you need specific contingent beneficiaries, there are two ways in which your requests can be carried out in the event of an heir who predeceases you. A “per capita” designation means that the predeceased heir’s share is divided amongst the remaining heirs. For example, if you name three beneficiaries to equally share in your account, and one passes away before you, then the other two surviving heirs will share in the account unless you designate otherwise.
A “per stirpes” designation means that in the event of a beneficiary who predeceases you, that individual’s heirs will stand in their place and receive their bequest. This can sometimes be a better way to carry out your true estate planning intent. In the same example of three named beneficiaries, if one were to predecease you, then that individual’s heirs would receive their share instead of the two other beneficiaries you named.
In any case, the best way to avoid any uncertainty is to regularly review and update your account designations as appropriate.