The Proper Way to Name a Minor as Your IRA Beneficiary
January 31, 2020
One of the more common requests we hear from clients is their preference to name their minor children as IRA beneficiaries. Unfortunately, minors are legally unable to own property, and therefore cannot inherit IRA assets in their own name; however, there is a “right” way to pass IRA assets to your minor children, and it all has to do with how the beneficiary designation is worded. Naming minors outright will lead to unnecessary complications for their legal guardian and delay the transfer of assets to your intended recipient.
Historically, passing roth IRA for minors like your children or grandchildren has been a successful tool to pass wealth to future generations, as distributions from those inherited IRA accounts could be “stretched” over the course of that young person’s lifetime. Today, this is no longer the case. The SECURE Act was signed on December 20, 2019 and has significantly changed the landscape of retirement account distributions, capping the timeframe to fully distribute an inherited IRA to just 10 years from the original IRA owner’s death.
As it pertains to minors, they could fall under the “Special Rule for Minor Children”. Minor children will be allowed to take age-based distributions until they reach their state’s age of majority, and then the 10-year rule will kick in. The age of majority is the age at which minors cross into legal adulthood. In California, (and in almost every state including the District of Columbia), the age of majority is 18 years old. There are only three exceptions: In Alabama and Nebraska, it is 19 years old, and in Mississippi it is 21. It’s important to note that this special rule does not appear to apply to all minors—so grandparents leaving IRAs to a grandchild would not fall under this rule. For some highlights on the SECURE Act, I encourage you to read Making Retirement More SECURE.
Beyond using inherited IRAs as a wealth transfer tool, another reason to name a minor as beneficiary is when you simply have no other option. There are more preferable avenues to leaving IRA assets to a minor child, which can be addressed through careful estate planning. However, during times of transition, such as the finalization of a divorce, choosing the estate planning route may not be feasible at that moment in time. In these instances, you can name a minor as an IRA beneficiary, but you must also identify on the beneficiary designation form who will act as that minor’s guardian for the IRA assets. This guardian will be charged with managing the inherited IRA on the minor’s behalf until they reach legal adulthood. If you fail to identify a guardian for the minor, the IRA custodian will require further documentation—such as a court order—stipulating whom has been appointed as guardian. It is best to identify the guardian in advance, as you would likely have minimal control over whom the court appoints.
As a general rule of thumb, retirement account beneficiaries should be reviewed on a regular basis to ensure the listed parties are still in keeping with the account owner’s wishes. As life circumstances change, so too could your plan for whom will inherit your retirement assets. Beneficiary designations can be changed at any time and your team at Sand Hill is always available to review your current beneficiaries and coordinate any updates when necessary.
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