Many investors treat the IRA beneficiary form as an afterthought when opening up an IRA account or rolling amounts over from a 401(k) to an IRA. Don’t fall into that trap. Since IRA accounts were first introduced in the mid 1970s, they have become an increasingly large portion of most family’s net worth.

 So your IRA beneficiary form may actually control the ultimate disposition of more of your estate then your will or revocable trust does. Typically, most name their spouse as the primary beneficiary of their IRA account. Your spouse has the ability to roll over the IRA tax free, and to continue deferring the gains and income until amounts are withdrawn from the IRA account.

 Many will name minor beneficiaries (those 18 or younger) as either contingent beneficiaries or in some cases as primary beneficiaries to the IRA account. There are real economic advantages to younger people inheriting IRA accounts. First, because the young person has a long life expectancy, she will have very low minimum required distributions following the account holder’s death.

 Unlike those of us who create our own IRA, beneficiaries who inherit an IRA do not wait until they are 70½ to have required minimum distributions. In fact, beneficiaries to inherited IRAs have required minimum distributions every year following the original account holder’s death (unless the beneficiary is a spouse who rolls over the IRA as mentioned above).

 Because a minor beneficiary’s minimum required distributions are so little, the majority of the account continues to grow tax deferred for many years. A $100,000 inherited IRA account growing at 6% could mean withdrawals of more than $2 million over the course of a minor beneficiary’s lifetime if she takes only the minimum distributions each year.

 Many find the number appealing and therefore name grandchildren or other minors as beneficiaries to their IRA account.

 Before you do so, consider that if you die and the minor is a direct beneficiary of the account, administrative problems will likely arise without more advanced estate planning.

 This is because a minor cannot sign his name and bind himself legally to a decision. The IRA custodian (typically the bank or brokerage firm that holds the IRA) therefore has liability if the minor makes a decision that ultimately turns out to be bad, and then blames the custodian. Consequently, the IRA custodian will require that a guardian be appointed by a court to oversee the minor’s IRA account and approve all of its transactions until the minor reaches the age of majority.

 The guardian must report to the court and file accountings annually. This whole process can be time consuming and expensive.

 One way to resolve this problem is to create a special retirement plan trust for the minor. This special retirement plan trust is usually a separate trust from your revocable living trust. That’s because this special retirement plan trust must meet five requirements under the IRS rules to qualify the minor beneficiary for the tax deferred treatment. Some of the criteria aren’t satisfied and in fact conflict with certain provisions found in most revocable living trusts.

 So long as the special retirement plan trust meets the five criteria, you can select the trustee of the trust who should be an adult and can serve the role that the guardian would have played had the minor been named directly. This trust therefore avoids the court process – saving the family money on administrative tasks.

If you have a larger IRA account balance and would like to name minor(s) as a beneficiary to all or a portion of the IRA account, talk to your estate planning attorney about how you can accomplish that in the most advantageous way.

 ©2009 Craig R. Hersch