The tax code permits a person establishing an IRA to designate beneficiaries who will inherit the account assets upon the death of the IRA holder. These assets pass directly to the named beneficiary outside the probate system (i.e., regardless of the terms of the account holder’s last will and testament) unless the account holder’s estate is named as beneficiary. The value of the assets in the IRA is included in the deceased holder’s taxable estate for purposes of determining any estate taxation.
Any number of individuals may be the beneficiary of an IRA. For instance, an IRA owner may name a surviving spouse, children or grandchildren, non-family members, domestic partners, their estate, trusts or charitable organizations as beneficiary. An IRA owner’s right to change beneficiaries continues until death. The choice of beneficiary may affect the calculation of minimum required distributions when the IRA holder reaches age 70½, depending on whether the beneficiary is a surviving spouse or someone else. This is also true of the legal and tax treatment of an IRA beneficiary, upon the IRA holder’s death. (see Distributions)
IRA holders must be aware that failure to name a new beneficiary if the primary beneficiary dies may lead to accelerated distribution of the proceeds and adverse income tax consequences. Similarly, if children are named as equal primary beneficiaries, the beneficiary form should provide for the distribution of the share of a beneficiary who predeceases the account owner. IRA beneficiary forms may be customized to provide that, for example, the share of a primary beneficiary who dies before the account owner will go to either his or her descendents, or, if the beneficiary dies without children, to the other beneficiaries.