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Sometimes You Need a Customized Beneficiary Designation Form for Your IRA

Occasionally in estate planning, the need for a customized beneficiary designation form arises.

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Most people are aware that their IRAs, life insurance, and certain other accounts they own are payable to their designated beneficiary or beneficiaries - the provisions in their will or living trust have nothing to do with where their IRA goes when they die.

And with many people having the majority of their financial wealth in their individual retirement account, the beneficiary designation language becomes just as important, if not more important, than the customized language of their last will and testament or their living trust.

For many, the traditional beneficiary designation form is sufficient. For example, in many traditional families, the IRA owner will name his or her spouse as the primary beneficiary, and will name the children as the contingent beneficiaries.

However, in some circumstances, it becomes necessary to name a trust as a beneficiary of an IRA. Having children who cannot handle a lump of money, or having a blended family situation, are common examples where creating and naming a trust as a beneficiary may be important. Note that Traditional IRA owners who name trusts as beneficiaries may be triggering adverse income tax consequences to the beneficiaries of the trust.

However, in some instances, neither naming individual beneficiaries, nor naming a trust as a beneficiary, accomplishes the estate planning objectives of the IRA owner. It becomes necessary that a custom beneficiary designation form is drafted and submitted to the financial institution where the IRA is held.

There are many instances where a custom beneficiary designation may be necessary. Let's say, for example, that Dad wants one of his three children to get a minimum of $500,000 from his IRA. At the time that Dad is completing his designated beneficiary form, his IRA value is $1,500,000. But Dad knows that the value of his IRA will change before he dies. Dad may need his estate attorney to draft a customized beneficiary designation form that provides that if, at the time Dad dies, Dad's IRA exceeds $1.5 million, then the three children will divide the IRA equally. However, the customized beneficiary designation will further provide that if the value of Dad's IRA is less than $1.5 million when Dad dies, then Child #1 will get the first $500,000, and the other two children will divide equally the remainder.

Since the IRA, life insurance policy, or annuity may be the largest financial asset an individual owns, it becomes critical that the proper attention be given to the beneficiary designation, particularly if the circumstances surrounding the estate are unique or complex.

This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship.

Paul Rabalais

Louisiana Estate Planning Attorney

Phone: (225) 329-2450