Dear Liza: My Stepmother had a pension, my father was the beneficiary after she died. He made me beneficiary after his death. After he died, I received the pension. Now my stepmother’s sister wants it. She is not a beneficiary. Is she entitled to it? Can she try to fight it? Your stepmother’s sister, based on what you’ve written here, is not entitled to that pension. If she isn’t the named beneficiary, she’s not entitled to the money. It’s that simple. When an account or a pension has a named beneficiary, that beneficiary is the only person entitled to that asset. Period. Unless your father didn’t have the right to name a beneficiary after his death, or was somehow named improperly by your stepmother, no one else but you would be entitled to the money. In other words, if a beneficiary is improperly designated, then that beneficiary designation itself can be challenged. But otherwise, the account holder’s designation of a beneficiary is the last word.
Category Archives: beneficiary accounts
Dear Liza, I am the personal representative for my mother’s estate in Maryland. My mother, who is deceased, was the beneficiary of a small IRA. My mother’s estate is to be divided among her three grown daughters, myself included. Who pays the tax on the IRA when it is withdrawn? The beneficiaries (you and your sisters) will be responsible for the income tax due on the IRA when you withdraw it. You will each get what’s called an “Inherited IRA.” Check with your plan administrator to find out what your options are for those withdrawals. You probably will have to withdraw the money within five years of your mother’s death, you will definitely have to start withdrawing the money within the first year.
Dear Liza: If I’d like to designate my young child as beneficiary on a retirement account and bank account by naming a custodian under CUTMA, how do I specify that I want the custodial account(s) to last until my child is 25? Naming a custodian under CUTMA (which stands for California Uniform Transfers to Minors Act) for a gift to a child under the age of eighteen is an excellent idea. If you don’t, and you just name a minor directly as a beneficiary, and if the gift is more than $5,000, a guardian of the estate will have to be named by a court before the financial institution will release the funds.
But, clearly, you already know this, or you wouldn’t have asked! And you also know that a CUTMA account can last longer than age 18. In California, where I’m licensed to practice, the longest you can make a CUTMA account last for a gift made during your lifetime is 21. A CUTMA account can last to age 25 only for gifts made in a Will or a trust, or on a beneficiary designation that applies after death.
The way you’d do this is to write down: “________(THE ADULT), as custodian for ________(THE MINOR) until age 25 under the California Uniform Transfers to Minors Act” on the beneficiary form.
All states except Vermont and South Carolina have adopted the Uniform Transfers to Minors Act law, which allows you to name a custodian for a minor’s property. Some states terminate such accounts at 18, most terminate at 21, and some, like California, allow them to last to age 25 in certain circumstances. Here’s a link to a guide to all of the states that have adopted this law and the age limits applicable in each state.
Dear Liza: I want to name my minor grandchildren as beneficiaries of my IRA account. How do I do that? Can I use my Will? It’s a smart idea to name minors as beneficiaries of your IRAs. Since they are young, they’ll be able to withdraw that money slowly over their life expectancy, and only pay taxes on the amounts withdrawn. But you are also correct in understanding that minors need some kind of property guardian or custodian named to manage those assets for them until they are 18–since minors can only own a minimal amount of property.
So, how do you do it?
Don’t try and name beneficiaries in your Will. It won’t work. Your Will is a legal document that governs the distribution of many of your assets, but NOT your retirement accounts. Those will pass only by the beneficiary designations on file with the plan administrator.
Here are the ways that I would advise you to let them know what you want them to do:
You can just name the minor as a beneficiary. Then, if you die while that child is a minor, their parent will need to ask the probate court in their county to name a Property Guardian to manage that account until the child is 18. (The property guardian could be the parent.) In some states, if the IRA is small enough, no property guardian need be appointed, but that will vary state to state. This isn’t ideal, since going to court takes time and some money for filing fees and it ends when the child turns 18 (at which point the money is theirs to manage and spend).
Alternatively, you can name a custodian under your state’s Uniform Transfer to Minor’s Act, which will make that person the custodian for those assets up to a certain age (21 in many states: 25 in others). A beneficiary designation like this would read, “Alan Smith, as custodian for Jane Smith, under ___’s Uniform Transfer to Minors Act to age 25.” Custodial accounts are inexpensive and easy to open at banks and brokerage accounts and end at 21 or 25 (usually), which is older than 18.
Finally, you can name a trust created for that minor as the beneficiary. That way, the trust will manage the money for that child and can last as long as you’d like it to last. A designation like this would read, “Trust created for the benefit of Jane Smith, under the SMITH FAMILY TRUST, under Agreement dated _______.” Trusts can have whatever terms you’d like to use and can last as long as you’d like them to last. IRA withdrawal rules are complicated when a trust has more than one beneficiary, so it’ s not a do-it-yourself project. Their main disadvantage is cost — you’ll have to work with an attorney to draft them.
If the plan administrator doesn’t have a form that makes it easy to name a custodian or a trust, you can do it anyway. Just attach a beneficiary designation form to their form, and make sure that they provide you with confirmation that your wishes have been properly received.
Dear Liza: My Dad passed away last year in the month of November. Prior to Daddy’s death, he was receiving monthly pension benefits. Once my step-mother notified the insurance company that Daddy had died, the company immediately withdrew his pension benefits from their checking account in the month of December. Up to this date, my step-mother hasn’t been able to receive Daddy’s pension benefits. Can the insurance company refuse to give my step-mother my dad’s pension benefits? Yes, they can. Pensions often terminate upon the death of the participant. Unlike an IRA or 401-K, traditional pensions are often promises of a monthly benefit for the lifetime of an employee, based on the length of time that employee worked for the company. (IRA’s and 401-K plans allow an employee to save their own money during their peak earning years on a tax-deferred basis, so that they can withdraw the money after they’ve retired. If they die with money left in those accounts, they can leave this money to a named beneficiary.) Sometimes, a pension plan allows an employee to elect to take less during their lifetime so that their surviving spouse can receive benefits during his or her lifetime, but not always. If your father had a plan that only paid him a pension during his lifetime, your stepmother wouldn’t be entitled to any benefits under the plan. Perhaps your stepmother can get clarification of how the pension worked from your father’s former employer.
Dear Liza: My Mother passed in Feb of this year. She opened a joint account with my Sister, so, should she become incapacitated, my sister could write checks on her behalf and it was opened with the understanding, that should something happen to my mother, the joint checking account should be split with her six other brother’s and sisters. My sister is claiming the money is now hers to do with what she wants, who is right? This is one of those estate planning situations that come up a lot, and it’s also one where the law is clear, the moral obligations murky. Aged parents often put one child on an account like that, to make it easier to let them take care of their finances. But in making your sister the joint owner of the account, your mother also made her the legal owner of the money now because she is the surviving joint owner. If your mother had wanted to make absolutely bullet-proof sure that any money in that account was to be split equally among all seven of you, she should have put that account into the trust (assuming that the trust splits everything seven equal ways) or named all seven of you as pay-on-death beneficiaries. But, of course, that’s no solace now. If your sister wants to honor your mother’s wishes, she could do that, but she’s not legally obligated to do so.
Dear Liza: My father just died. He left his Roth IRA to ten family members, thrilled to be leaving us with a long-term retirement investment. But two of the beneficiaries are under 18, and our credit union is saying that the minors can’t keep the Roth IRA, but have to cash out their shares and open custodial accounts. That’s not what my Dad would have wanted. Are they right? Yes, most likely. Here’s the deal: a minor can inherit property, but under state law, minors can’t control that property until they’re legal adults. In California, where I practice, a minor cannot own more than $5,000 without some form of legal control and management by an adult, like a property guardianship, a custodial account, or a trust for that minor’s benefit. A property guardian is appointed by the court, and may be a child’s parent or any person nominated by the parent. The guardianship terminates when the child becomes a legal adult — 18 in my state, but this varies by state law as well. So, check with your credit union to see if they’d permit you to keep those accounts under a property guardianship to age 18. If so, it may be worth it to you get yourself appointed as property guardian. Alternatively, cash those accounts out, open up a custodial account at the credit union, and don’t let those kids touch that money. When the custodial accounts end (25 in my state; varies by state law), make them open up IRA’s with the money because that was your father’s wish. You can’t legally require that they do so, but you can make them feel really, really guilty if they don’t.
Dear Liza: My father recently died. My mother died years ago. I just assumed that I’d be the beneficiary of my father’s IRA, and I paid all of the funeral costs and other costs associated with my father’s death. Altogether, that came to about $8,000. When I contacted the IRA plan administrator, they told me that I wasn’t the beneficiary. They wouldn’t even tell me who the beneficiary was! Turns out it is my uncle. Can I open a case in probate court to challenge this? That should be my money. I hate to be the bearer of bad news, but you really can’t go to court to challenge this unless you think there is something fraudulent about the beneficiary designation that named your uncle (for example, the signature was forged or your father was forced to do it). And even then, it wouldn’t be a probate matter, as assets passing by beneficiary designation don’t go through probate. Your father had the right to name anyone he pleased as the beneficiary of his IRA. Maybe he named his brother long ago, and just forgot to change it to you. That happens sometimes. But whatever reason he had, the money goes to the named beneficiary, period. You might appeal to your uncle’s good nature and sense of fairness, but you can’t obligate him to share.