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are young, they’ll be able to withdraw that money slowly over their life expectancy, and only pay taxes on the amounts withdrawn.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.