Remember when you opened your IRA account? And the broker or advisor handed you that 37-page document with the custodial agreement in it? Read that cover-to-cover, dintcha?
Unfortunately, too many of us don’t read these documents closely, and end up getting a big surprise later on. What sorts of surprises, you might ask…? Well, here are two major surprises that could await you:
Per Capita or Per Stirpes? If you have multiple beneficiaries of your IRA, this will be important to know – because it’s up to the custodial document to determine how your account will be distributed. Here’s why – Per Capita means that, for example, if you have three equal beneficiaries designated on your account and one of the beneficiaries pre-deceases you, the account will then be split in two, between the two remaining beneficiaries. If the account were to be split Per Stirpes, the two remaining beneficiaries would each receive a 1/3 share, and the beneficiaries of the deceased beneficiaries would receive the remaining 1/3 share. Typically there is a check-box on the beneficiary form to help you designate your beneficiaries as you wish, but ultimately the control comes down to the custodial doc. This becomes even more important with the second consideration…
Divorced, but forgot to change beneficiary form? Depending upon the custodial agreement, the custodian could follow the court’s ruling, wherein the divorce decree declares that all property is split as indicated and named in the document, with no other splitting to be done; or, the custodian could go strictly “by the book”, where the beneficiary form indicates a specific individual as the primary beneficiary, regardless of any other outside document. And here is how the Per Stirpes/Per Capita issue becomes important in this case: what happens if the former spouse is the only named beneficiary on the account (no secondary beneficiary(s)), and the former spouse pre-deceases the account owner? If the custodian holds to the Per Stirpes definition, the former spouse’s heirs could reap the benefits of the account… scary huh?
So, in the end, it pays to know a little about the custodial documents on your IRA account, just so you don’t have any surprises. If you don’t understand it or can’t follow what the document is telling you, make your advisor explain it to you – especially these two factors mentioned above. That’s part of an advisor’s job – to advise you – and you’re paying them to do that sort of thing.
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I can learn from you, you can learn from me - please leave your comments and links!Jim Blankenship, CFP®, EA, is an expert in personal retirement, IRAs, and tax issues, with more than 25 years of experience in the industry. Read more from this author
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