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George F. Bearup, J.D. Senior Legal Trust Advisor

August 14, 2023

Successor IRA Beneficiaries

Take-Away: It is important to distinguish between a successor IRA beneficiary and a contingent IRA beneficiary. The rules are different for each.

Background: No, this is not yet another missive about eligible designated beneficiaries or non-eligible designated beneficiaries of inherited retirement accounts. Rather, it explains the rules that apply to a contingent or a successor beneficiary of an inherited IRA.

Contingent Beneficiary: A contingent  beneficiary is entitled to the IRA only if the primary designated beneficiary either does not survive the IRA owner’s death, or the primary designated beneficiary disclaims his/her beneficial interest in the inherited IRA. Consequently, IRA ownership for a contingent beneficiary is a function of chance. There are no special distribution rules created for a contingent beneficiary beyond the SECURE Act’s 10-year distribution rules.

  • Example: Homer owns a Roth IRA worth $200,000. Homer’s IRA beneficiary designation form names his wife Marge as his primary designated beneficiary. However, Homer fails to name a contingent beneficiary for his Roth IRA. Homer and Marge have a disabled son, Bart. On Homer’s death Marge meets with the Roth IRA custodian. Marge was thinking of disclaiming her interest in Homer’s Roth IRA in the belief that Bart could  benefit from the Roth IRA’s tax-free income since Bart is unable to work due to his disability. However, because Bart was not named as the contingent beneficiary of Homer’s Roth IRA, a disclaimer by Marge will not work to shift the Roth  IRA (and its tax-free income) from Marge to Bart. If Marge were to have disclaimed her interest in Homer’s Roth IRA, the Roth IRA would then be paid to the default beneficiary that is identified in the Roth IRA custodial agreement, which happens to be Homer’s estate.
  • Example: Elaine, age 75, owns a traditional IRA. Elaine dies having named her friend Jerry, age 72, as her primary designated beneficiary. Her friend, Kramer, is named as the contingent beneficiary of Elaine’s IRA. Since Jerry is less than 10 years younger than Elaine, Jerry is an eligible designated beneficiary. Just 6 months after Elaine’s death, Jerry dies in a car accident (George was driving!), but without completing the necessary paperwork needed to make Elaine’s IRA Jerry’s inherited IRA. The assets held in Elaine’s IRA do not pass to the contingent beneficiary, Kramer. Jerry, as an eligible designated beneficiary, is deemed to have created an inherited stretch IRA for himself. The custodial document that Elaine completed identifies Elaine’s estate as the default beneficiary. Therefore, an estate-owned inherited IRA will be established. Since Jerry was an eligible designated beneficiary who was allowed to stretch required minimum distributions (RMDs), Jerry’s estate, as successor, will follow a ‘new’ 10-year distribution period. Annual RMDs will be due in years 1-9 based on Jerry’s single life expectancy, and the estate-owned inherited IRA must be emptied by the end of year 10.

Successor Beneficiary: A successor  beneficiary is the, in effect, a beneficiary-of-a-beneficiary. A successor  beneficiary only appears after an IRA has already been inherited by its previous primary designated beneficiary. In other words, if the first (primary) beneficiary dies, the individuals he/she named on the primary’s own beneficiary designation form (assuming one is completed after the IRA owner’s death) are the successor beneficiaries.

  •  Successor Distribution Rules: Unlike a contingent beneficiary, there are special distribution rules for a successor beneficiary of an inherited IRA. The SECURE Act makes it clear that successor beneficiaries are bound by the 10-year distribution rule. Accordingly, if the previous beneficiary was using the 10-year distribution rule, their successor beneficiary must continue following that same 10-year distribution period. If the previous beneficiary was an eligible designated beneficiary who was stretching annual distributions over his/her lifetime, a successor beneficiary is entitled to start his/her own 10-year distribution period, but the successor beneficiary must continue annual required minimum distributions (RMDs) during years 1-9 of the 10-year period based on the first (eligible designated) beneficiary’s life expectancy. 
  • Example:  George died in 2020 at age 74. George’s brother, Jeb, age 65 is named as the primary beneficiary of George’s IRA. Jeb is less than 10 years younger than George, so that Jeb is an eligible designated beneficiary. Therefore, Jeb can take annual RMDs using his own, single, life expectancy. Jeb names his niece, Jenna, as the successor beneficiary of the inherited IRA. Jeb dies in 2022. Jenna is subject to the 10-year distribution rule. Jenna must empty the inherited IRA by December 31, 2032. During the 10-year period, Jenna must take annual RMDs in years 1-9 based on Jeb’s single life expectancy.

Conclusion: These distribution rules are highly complicated and often ignored, or completing an IRA beneficiary designation form is often put-off to a later date. Adding contingent beneficiaries is always important, just as it is naming successor beneficiaries by the inheritor of the IRA, even if the decision has not yet been completed to disclaim some or all of the inherited IRA. What is important is to avoid, if at all possible, triggering the default beneficiary under the IRA custodian’s form, which is usually the decedent’s estate.