How to Distribute an IRA When the Primary Beneficiary Dies
By Deborah Shipman, CIP, CISP, CHSP
How are beneficiary payouts affected when a primary beneficiary dies after the IRA owner?
When a primary beneficiary dies after the IRA owner, he is still considered a beneficiary. If that deceased beneficiary did not name secondary beneficiaries to continue receiving his portion of the IRA, it will be subject to the probate laws that would apply to his estate. If the deceased beneficiary did name beneficiaries to receive his portion of the IRA upon his death, they will receive his portion of the IRA assets. Keep in mind, however, that such secondary beneficiaries would not be able to use their own life expectancies to determine the required payments.
Example 1
Thomas was the original IRA owner and William, Joseph, Lynne, and Louise are each 25% primary beneficiaries. Thomas died in January of this year. Louise died in March of this year and did not name beneficiaries to her inherited IRA assets. According to the default in the IRA Agreement, Louise’s estate becomes her beneficiary. Therefore, the financial organization will pay out as follows; 25% each to William, Joseph, Lynne, and Louise’s estate.
Example 2
Joanne was the original IRA owner and Jackson, Jacob, Vanessa, and Sue are each 25% primary beneficiaries. Joanne died in January of this year. Sue died in March of this year and named Benjamin and Evelyn as each 50% beneficiaries of her inherited IRA assets. Therefore, the financial organization will pay out as follows: 25% each to Jackson, Jacob, and Vanessa, and 12.5% each to Benjamin and Evelyn.
How are beneficiary payouts affected when a primary beneficiary dies before the IRA owner? Do we just divide his or her percentage equally among the remaining beneficiaries?
Not necessarily. If a primary beneficiary dies before the IRA owner, she generally ceases to be a beneficiary and the assets would be divided among the remaining surviving beneficiaries. (Less common than this “per capita” beneficiary succession is what is known as “per stirpes” succession, in which the heir(s) of a primary beneficiary who died before the IRA owner would inherit after that primary beneficiary’s death.) If the original beneficiaries are entitled to equal percentages, then they are entitled to an equal share of the predeceased beneficiary’s portion. But if the original beneficiaries are not entitled to equal percentages, then they are not entitled to an equal share of the predeceased beneficiary’s portion.
Example 1
Mark was the original IRA owner and Logan, Kathryn, Elizabeth, Andrew, and Erika are each 20% primary beneficiaries. This year, Erika died in April and Mark died in May. Because Erika predeceased Mark, the original IRA owner, she is no longer considered a beneficiary. Additionally, because Logan, Kathryn, Elizabeth, Andrew, and Erika were named as equal beneficiaries at 20% each, the surviving beneficiaries will split the IRA assets equally, with the financial organization paying out as follows: 25% each to Logan, Kathryn, Elizabeth, and Andrew.
Example 2
Sarah was the original IRA owner and Amy, Melissa, Peter, Michelle, and Luke are primary beneficiaries—each designated a different percentage: Amy 15%, Melissa 5%, Peter 5%, Michelle 40%, and Luke 35%. This year, Luke died in April and Sarah died in May. Because Luke predeceased Sarah, the original IRA owner, he is no longer considered a beneficiary. Additionally, because Amy, Melissa, Peter, Michelle, and Luke were named as beneficiaries with different percentages, the surviving beneficiaries will each receive a portion of Luke’s 35 percent based on their initial percentage.
To determine the surviving beneficiary’s new percentages, the financial organization will
1) add together the surviving beneficiaries’ original percentages (15 + 5 + 5 + 40 = 65), and
2) divide each of the surviving beneficiaries’ original percentages by the total percentage to be received by the surviving beneficiaries (15/65 = 23.08%; 5/65 = 7.69%; 5/65 = 7.69%; 40/65 = 61.54%).
The financial organization will pay out deceased beneficiary Luke’s share as follows: 23.08% to Amy, 7.69% each to Melissa and Peter, and 61.54% to Michelle, all of which total 100% (23.08 + 7.69 + 7.69 + 61.54).
