Beneficiary designations are not the answer in every situation
Dear Dan,
My IRAs are all Roth IRAs. My wife has no IRA. I am younger than my wife, but I’ll probably pass on before her. We have two kids jointly. We want all the Roths (and other money) to go to whichever of us survives, and then distributed to both of the kids (equally). We want to keep the Roth money until we both pass on, but we probably don’t really need it, as we have other funds to live on. What should my wife do with the Roths after I die?
— Roth planner
Dear Roth planner,
The simplest way to accomplish this with the Roth IRA accounts is through the beneficiary designations. Consider naming your wife as 100% primary beneficiary and the two kids as equal contingent beneficiaries. This gives your wife the right to take the Roth IRA into her own ownership. She will have complete freedom to do as she pleases with the funds and unlike nonspouse beneficiaries, she will not be subject to any Required Minimum Distributions.
By naming the kids as contingent beneficiaries, they will get their share of the funds in the event your wife is not alive when you die. When either of you passes, the survivor can change the primary beneficiary designation on the account to the kids 50% each to make the next transfer smoother for them.
When naming the kids as beneficiaries, you can choose to designate their shares to be split “per stirpes” or “per capita.” Per stirpes is Latin for “by the branch.” If one of the kids is not alive to receive their half, those funds would stay with that branch of the family tree and go to that deceased sibling’s heirs. By contrast, per capita means per head, so if one kid is not alive to receive their half, those funds would go to the surviving sibling.
Beneficiary designations make asset transfers fairly easy and avoid probate, but they are not a cure-all. Other types of accounts and assets will not offer beneficiary designations. Some heirs may not be good with money, married to iffy people, work in litigious fields or have some other circumstance in which having unfettered access to the funds could be problematic. Such circumstances are often handled best through trusts which present their own set of pros and cons.
While you are contemplating how to pass the Roth IRA to your family, you should consider other estate planning documents. Most people should have a will, a durable power of attorney, and documents that name the people that will make healthcare decisions on your behalf should you be unable to do so yourself, among other documents.
You should discuss all this with a competent attorney. It can sound like a lot, but good estate planning can be invaluable. Whether your situation is simple or complex, planning and proper documentation is required if your wishes are to be carried out.
If you have a question for Dan, please email him with “MarketWatch Q&A” on the subject line.
Originally published on MarketWatch. Read the original article here.