A Beneficiary Designation Dilemma

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Since families today are different and more complicated from the traditional situation, with ex-spouses, children from first and subsequent marriages, and children from unions where a marriage didn’t take place, designating beneficiaries for IRA accounts can be very complex.

For example, it’s not out of the question for an individual to have re-married later in life and have children from an earlier marriage. In addition, the new spouse could have children from his or her previous marriage.  And then possibly children resulting from the current marriage.

So, this individual might wish to leave the proceeds of his IRA to his or her current spouse first and foremost at his or her passing – but then to split the remainder of the account among his or her children from the first marriage and the children from the second marriage equally. If you know anything about how IRA beneficiary designation forms work, this situation likely couldn’t be accomplished using that simple form.  You need something more…

QTIP Trust

The tool you’re looking for here is a QTIP trust.  No, it has nothing to do with a stick with cotton on the end of it or any bathroom product for that matter, QTIP stands for Qualified Terminal Interest Property.  This QTIP trust is a special sort of trust that allows an individual to leave the income from their assets to a spouse and then, at the death of the surviving spouse the remaining principle is passed on to the beneficiaries designated by the original owner of the account(s).  In this fashion the children from the previous marriage have protection of the assets that they would eventually receive.

If a vehicle such as a QTIP trust isn’t used, then the current spouse could take control of the account and either use up all of the assets, or change the beneficiaries to only include his or her own children, excluding the children from the former marriage.

QTIPs are very complicated to put into use, since there are a lot of moving parts, beneficiaries, and a considerable amount of time could elapse from the time it is put into play (the first death) and the death of the surviving spouse.  The distribution process from the IRA is also complicated, since using a trust as a beneficiary takes away the designated beneficiary from the process, meaning that the account would be distributed to the trust within five years, as an example.

It’s best to make sure you’ve got an attorney who specializes in estate planning and IRAs to help with the process. But if you have a situation like the one described (or even more complicated) the QTIP trust may be your best bet to accomplish what you’d like to do with your IRA.  Incidentally, other assets besides an IRA could be put into a QTIP trust as well, for the same purpose.