Q.: Hi, I have a question for you regarding an IRA. My father left his IRA to his four children. Before we got the papers signed for the kids to get their part, one of the siblings passed away. He was married, will his wife get that sibling’s part? Her name is nowhere on the IRA. What will happen with the sibling’s part that passed away? Thank you
A.: My condolences to you and your family on the death of your father and your sibling.
The disbursement of an IRA account is determined by the beneficiary designation. These transfers occur without probate and without regard to other documents that may be in place such as wills or trusts. Because your sibling was alive when your dad died, his share became his upon your dad’s death. Your sibling’s share is therefore part of your sibling’s estate now that he has died.
If the paperwork were signed prior to your sibling’s death, he probably would have established an Inherited IRA and named his own beneficiaries. Those beneficiaries would now get the assets based on the beneficiary designation your sibling filed for the Inherited IRA.
However, since no paperwork had been processed, what happens next depends on what your sibling’s estate documents say. If he has a will, it will state who gets what and when. This will require probate. The will likely names his wife beneficiary and if that is the case, she would get the funds.
If there is no will, the intestate laws of his state apply. The disbursements under intestate laws are facilitated through the probate process. Most of the intestate laws favor the spouse over children or other relatives.
Now, had your brother passed away before your dad died, the beneficiary forms on your dad’s IRA would determine who gets your sibling’s share and your sibling’s will or lack of a will wouldn’t matter. Your sibling’s share would go to whoever your dad designated as a contingent beneficiary.
It is also possible that your dad’s beneficiary designation could have included a “per capita” or “per stirpes” election. These elections only apply when a beneficiary pre-deceases the IRA owner. A per capita (per head) election would mean the IRA would be split between the three beneficiaries that survived your dad. Per stirpes (per branch) would mean that the one-fourth share for your deceased sibling goes to that sibling’s heirs.
The various scenarios help demonstrate the importance of properly designating beneficiaries on IRAs, Roth IRAs, retirement accounts, insurance policies and any other accounts that provide for a beneficiary designation. Put some thought into it and plan ahead. Don’t just slap a name or two on a form or worse fail to file a beneficiary designation form at all.
If you have a question for Dan, please email him with “MarketWatch Q&A” on the subject line.
Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo serving clients nationwide but with offices in Orlando, Melbourne, and Tampa Florida. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some questions are edited for brevity.
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