IRA beneficiary designations are commonly overlooked, but incredibly important. In general, a will does not affect the destination of IRA monies at death; instead, the beneficiary designation controls.
For whatever reason, many clients either don’t designate a beneficiary or forget to name a contingent beneficiary. If you don’t designation any beneficiary, the “default” beneficiary is normally the decedent’s estate, which is unfortunate. Absent creative maneuvering after death, the tax on the IRA will be accelerated when it is distributed to the estate. Had an individual been named, the individual could have withdrawn funds over his or her life expectancy, thus obtaining “stretch IRA” benefits.
If you name a primary beneficiary (usually your spouse), but no contingent beneficiary, the estate will once again become the default beneficiary if your spouse predeceases you. Thus, you should name your children, grandchildren, etc. as contingent beneficiaries. There is more. You need to specify what happens if a child of yours predeceases you. Do the siblings take the child’s share? Or do the child’s descendants receive the share? And what happens if one or more of the descendants are under 18, 21, or whatever age you think is appropriate for having responsibility over the funds? You may need to specify that a trust is the beneficiary if this occurs.
Finally, IRA custodians occasionally lose the beneficiary designation. So it makes sense to either check your IRA beneficiary designation from time to time, or just fill out a new form every five or ten years. Don’t rely on your recollection that you filled out a beneficiary designation 20 years ago….
If your IRA is substantial, it pays to get professional advice in designating beneficiaries.
PS – Is your former spouse still named as beneficiary?