Q. I have a large Traditional IRA, and I wish to name my wife as primary beneficiary and my children from a previous marriage as backup beneficiaries. Can I lock in this beneficiary designation plan on the IRA Beneficiary Designation Form I sign at the bank?

A. Unfortunately, not likely. While it is always a good idea to name both primary and contingent beneficiaries when you create your IRA, those designations merely determine the identity of the new IRA owner upon your death.  Under most plan documents, once the primary beneficiary – in this case, your wife – survives you, she then becomes the owner of the IRA for all purposes, and your contingent beneficiary designations become inoperative.  Your wife would then able to designate her own “successor beneficiaries” to take in the event that funds remain in the IRA when she dies.

If she neglects to do so, then the remaining funds would go per the default provisions of the plan document, which likely would be to her estate, potentially resulting in a probate, the distribution of the IRA to her beneficiaries, and the loss of the “stretch” payout option.

In short, most IRA custodians will not permit you to name successor beneficiaries at the time you create your account. This problem usually comes as a surprise to clients and typically arises in two contexts:

1) Your wife has given you her assurance that, if she survives you, she will re-designate your children from your previous relationship as her own successor beneficiaries.  However, at your demise, she suffers from some form of dementia and cannot take the steps necessary to honor her promise; or

2) You are concerned that your wife may remarry and feel it appropriate to name her new spouse as her primary beneficiary, and her own children as contingent beneficiaries.

What to do?

In the first case, one solution is for her to sign, now, a properly designed Durable Power Of Attorney (“DPOA”), which contains specific and comprehensive powers permitting her agent to act with respect to your IRA, including the power to elect to roll your IRA into hers to achieve the “stretch out” of payments.  Caution: To achieve your goal, it would be wise to verify that the beneficiary designations on her IRA are consistent with your own beneficiary wishes.  Also, some custodians have their own DPOA forms, so check with yours and, if so, complete the custodian’s forms as well as your own attorney-drafted DPOA.  Of course, if your wife has capacity at the time of your demise, she should, herself, re-designate her IRA beneficiaries as soon as possible.

In the second case, where you wish to lock-in the designation of your own successor beneficiaries, consider a stand-alone IRA Trust, sometimes called an Individual Retirement Trust (“IRT”).  This is a special kind of trust and is different from the typical “Living Trust”.  Note: there are pros and cons in making a trust the beneficiary of an IRA, including the possibility that doing so may preclude the surviving spouse from rolling your IRA into hers in order to “stretch” the distributions over a longer period of years, and thereby reduce the annual tax bite while allowing the IRA to grow in value over the longer term.

These are complex matters, and seeking the advice of qualified financial and legal advisors to assist you in choosing the most suitable strategy is strongly recommended.