Pass IRA to grandchildren to mitigate SECURE Act?

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waterlife
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Joined: Sun Mar 31, 2013 1:03 pm

Pass IRA to grandchildren to mitigate SECURE Act?

Post by waterlife »

Is anyone else considering skipping a generation when passing traditional IRA to heirs? In our case, it would increase the number of heirs and those heirs are in lower tax brackets than their parents. Also, the first generation doesn't need the money (diminishing utility of money.) I'm thinking that this would involve splitting the IRA into the number of grandchildren, and naming each grandchild as the recipient for Transfer On Death (TOD).
I looked into whether or not an IRA could have a primary beneficiary who could opt to "step aside" to allow the account to pass to a secondary, but at least at Vanguard, that doesn't seem possible. Vanguard says, "A secondary or contingent beneficiary will inherit your assets only if you have no surviving primary beneficiaries." The hope was that the grandchildren's parent could be primary and the grandchild secondary, in order to allow the parent to choose to inherent it for themselves in the event that a grandchild was behaving too badly.
Thanks everybody!
Longdog
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Re: Pass IRA to grandchildren to mitigate SECURE Act?

Post by Longdog »

On your first point, you don’t need to literally split apart the IRA - you’d identify each individual grandchild as a beneficiary.
On your last point, what you’re referring to is “per stirpes” beneficiary designation. But realize that if each child has a different number of children, then each grandchild will not get an equal share. Grandchildren in smaller families will get a larger share than their cousins in larger families.
Steve
lakpr
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Re: Pass IRA to grandchildren to mitigate SECURE Act?

Post by lakpr »

I think, to make changes to IRA or 401k/403b plan beneficiaries, one requires spousal consent, if married. Assuming spouse is onboard with the plans, it is simply a matter of changing beneficiaries in the plan or IRA.
lazynovice
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Re: Pass IRA to grandchildren to mitigate SECURE Act?

Post by lazynovice »

This concept including drawbacks and alternatives was explored in this thread a couple of weeks ago.

viewtopic.php?f=10&t=353256
stan1
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Re: Pass IRA to grandchildren to mitigate SECURE Act?

Post by stan1 »

I'd think twice about potentially disinheriting a grand child due to parents subjective evaluation of "behaving badly".

I'd just name the grandchildren as equal beneficiaries on the IRA account.

As always if your net worth is over $5M or there are other complicated situations go talk to your estate planning attorney. There are a lot of ways to add complexity to an estate plan. There's a trade off on whether the added complexity really has benefit in some cases. With the accounts current valuation how much would each grandchild receive?
Alan S.
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Re: Pass IRA to grandchildren to mitigate SECURE Act?

Post by Alan S. »

waterlife wrote: Sun Jul 25, 2021 5:17 am Is anyone else considering skipping a generation when passing traditional IRA to heirs? In our case, it would increase the number of heirs and those heirs are in lower tax brackets than their parents. Also, the first generation doesn't need the money (diminishing utility of money.) I'm thinking that this would involve splitting the IRA into the number of grandchildren, and naming each grandchild as the recipient for Transfer On Death (TOD).
I looked into whether or not an IRA could have a primary beneficiary who could opt to "step aside" to allow the account to pass to a secondary, but at least at Vanguard, that doesn't seem possible. Vanguard says, "A secondary or contingent beneficiary will inherit your assets only if you have no surviving primary beneficiaries." The hope was that the grandchildren's parent could be primary and the grandchild secondary, in order to allow the parent to choose to inherent it for themselves in the event that a grandchild was behaving too badly.
Thanks everybody!
An IRA passes by beneficiary designation, not TOD, although functionally the same. You would not partition your IRA into multiple accounts, you would just name the grandchildren individually, and you would have to keep the beneficiary designation current when a new GC is born. VG might not accept a beneficiary designation of "all my grandchildren equally" since that would require more discovery of who and how many grandchildren exist upon your death. What if adoptions take place, or if the child's ex gets custody of the minor grandchildren? A minor grandchild cannot inherit directly, they usually have to inherit through an UTMA account controlled by the UTMA custodian. But upon reaching majority, the GC will have full access to the inherited IRA, and could cash it out. Finally, if the GC are subject to the kiddie tax, their parent's tax rate will apply to unearned income from the inherited IRA.

Note that under the Secure Act, the 10 year rule will still apply to grandchildren unless a GC is disabled or chronically ill. Further, unlike a child of the IRA owner beneficiary, the 10 year clock is not extended when a GC is undertaking higher education.

Vanguard and other major custodians accept disclaimers (that is how a beneficiary "steps aside" )should you instead name the children as beneficiaries and their children as contingent beneficiaries. With a qualified disclaimer filed by the deadline the child could disclaim and their interest would pass to their contingent children. Of course, that would result in each child's children inheriting different amounts based on how many children each child had. Vanguard has historically declined complex designations that might address some of these issues.

In short, naming the GC presents several technical issues, and is probably not worth considering unless there are estate tax issues for the parents or they are irresponsible.
SobeCane
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Re: Pass IRA to grandchildren to mitigate SECURE Act?

Post by SobeCane »

Alan S. wrote: Sun Jul 25, 2021 11:02 am
Note that under the Secure Act, the 10 year rule will still apply to grandchildren unless a GC is disabled or chronically ill. Further, unlike a child of the IRA owner beneficiary, the 10 year clock is not extended when a GC is undertaking higher education.
Can you expand on this higher education exemption?
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Lee_WSP
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Re: Pass IRA to grandchildren to mitigate SECURE Act?

Post by Lee_WSP »

SobeCane wrote: Sun Jul 25, 2021 11:32 am
Alan S. wrote: Sun Jul 25, 2021 11:02 am
Note that under the Secure Act, the 10 year rule will still apply to grandchildren unless a GC is disabled or chronically ill. Further, unlike a child of the IRA owner beneficiary, the 10 year clock is not extended when a GC is undertaking higher education.
Can you expand on this higher education exemption?
Grandchildren are not automatically eligible designated beneficiaries unlike minor children of the decedent; they would need to meet some other requirement to be an EDB. Said minor children may extend their period of minority according to treasury regs Section 1.401(a)(9)-6, Q&A–15:

Treasury Regulation Section 1.401(a)(9)-6, Q&A–15 states, in part:
Q-15: Are there special rules applicable to payments made under a defined benefit plan or annuity contract to a surviving child?

A-15: Yes, pursuant to section 401(a)(9)(F), payments under a defined benefit plan or annuity contract that are made to an employee's child until such child reaches the age of majority (or dies, if earlier) may be treated, for purposes of section 401(a)(9), as if such payments were made to the surviving spouse to the extent they become payable to the surviving spouse upon cessation of the payments to the child. For purposes of the preceding sentence, a child may be treated as having not reached the age of majority if the child has not completed a specified course of education and is under the age of 26.
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FIREchief
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Re: Pass IRA to grandchildren to mitigate SECURE Act?

Post by FIREchief »

lakpr wrote: Sun Jul 25, 2021 5:51 am I think, to make changes to IRA or 401k/403b plan beneficiaries, one requires spousal consent, if married.
401k yes. IRA no. See my signature.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
Topic Author
waterlife
Posts: 51
Joined: Sun Mar 31, 2013 1:03 pm

Re: Pass IRA to grandchildren to mitigate SECURE Act?

Post by waterlife »

lazynovice wrote: Sun Jul 25, 2021 9:20 am This concept including drawbacks and alternatives was explored in this thread a couple of weeks ago.

viewtopic.php?f=10&t=353256
Thanks for this, it is very applicable.

Longdog and Alan S - Not needing to split the IRA will save us a lot of work (thanks!). There are equal numbers of grandchildren to each child, so unless a new one is added or dies, things should come out even.

Thanks everybody for responding.
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