Listing a beneficiary on your IRA costs nothing and will save time and possibly money for your heirs. Before we get into why let’s cover some basics.
The Account Holder
The account holder is the individual that has their name on the account. The IRA goes to its primary beneficiaries if the account holder passes away.
Primary or designated beneficiaries are the first ones to inherit a retirement account or life insurance policy. In the states of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin, the spouse must be listed as the sole primary inheritor. If they are not, the spouse must acknowledge that they understand that the account holder is listing a different party as the primary beneficiary.
The account holder can list as many primary heirs as they want, persons or entities, family members, or trusts that have been established. The account holder just needs to ensure the primary beneficiary percentage equals 100%.
Example: Let’s say the account holder has three children and wants to leave the IRA account evenly between the three children. Each child gets 33.33% (one will have 33.34%) if the account holder passes.
Contingent inheritors are the secondary beneficiaries. A contingent beneficiary would come into play if ALL of the primary heirs passed away BEFORE the account holder passed away.
Five Reasons Why You Need a Beneficiary on Your IRA Account
Now that we know some of the basic terminologies of beneficiaries let’s review why it is critical to have one listed. Updating inheritors to your account takes no more than five minutes. You’re setting your heirs up for greater success and ease of mind by taking just five minutes to review and update who inherits your account annually.
1. Simple transition of the IRA account
By listing your heirs, it is clear who inherits the IRA account when you pass away. Midland does not have to wait for legal documents to determine who gets what.
2. Quick transition of the IRA account
A simple cash transfer from a deceased IRA account holder to their heir can be done in a few days. If assets are involved, it can take a couple of weeks because the investments will need to be retitled in the name of the beneficiary or their account. Compared to having the IRA go to the estate, it can be months or even years before heirs can receive assets.
3. Avoid probate
Failure to list a beneficiary could mean it goes to the deceased account holder’s estate. This can drastically increase the time before an heir can inherit the account.
The probate process for the estate can take months, at the minimum, or years. Each state creates its own intestacy laws, laws that govern who inherits when there is no will, but most follow the Uniform Probate Code. These laws attempt to provide for inheritance as they assume the average person would do so if a valid will existed.
Intestate succession inheritance generally flows in this order:
- Surviving Spouse of Deceased
- Child of Deceased or the Offspring of Children
- Parents of Deceased
- Siblings of Deceased
- Grandchildren of Deceased
- Aunts and Uncles of Deceased and Other Extended Family
4. Allows you to have greater control
Following the Uniform Probate Code for most states, if your IRA goes to the estate, it is usually carried out in a specific order. When you list beneficiaries, you have the control to put whoever you want and whatever order you want them in. You can even elect to have a trust or another entity, such as a nonprofit, listed as a beneficiary. You do not have that control if the distribution of the account gets defaulted to the estate.
5. Fewer costs to your beneficiaries
By simply listing a beneficiary, your heirs can avoid having the IRA account go through probate. Probate and having everything go to the estate can cost thousands of dollars. You save your recipients’ money when it goes from the IRA account holder to the defined primary or contingent beneficiary.
Before Getting Started
You should review your beneficiaries each and every year to make any changes if needed. You can update the beneficiaries of your Midland Trust account online by visiting your Midland Portal. Start by clicking “Account Details” and then “Edit.”
MIDLAND TRUST COMPANY, NOR ITS AFFILIATES OR SUBSIDIARIES (COLLECTIVELY REFERRED TO AS “MIDLAND”), IS NOT A FIDUCIARY: Midland’s role as the Custodian and/or Administrator of self-directed retirement accounts is non-discretionary and/or administrative in nature. The account holder or his/her authorized representative must direct all investment transactions and choose the investment(s) for the account and is responsible for conducting his/her own due diligence. Midland has no responsibility or involvement in selecting or evaluating any investment and does not conduct any due diligence on any investment. Nothing contained herein shall be construed as investment, legal, tax, or financial advice or as a guarantee, endorsement, or certification of any investments.
Written by Andy Anger
Client Services Team Lead at Midland Trust Company