IRA beneficiary documents.

• Author: Koppel, Michael D.

While it is not uncommon to see careful attention given to "traditional" estate planning documents (e.g., wills and trusts), IRA plan documents do not receive the same consideration. There does not seem to be general respect for beneficiary provisions that are independent of a will. And yet, deferred compensation assets in many estates now exceed the value of the assets covered by traditional estate planning documents.

Beneficiary matters seem to be left to the investment broker entity by default. Such a situation may cause problems. At a taxpayer's death, a brokerage house may have gone through several changes (e.g., in entity format, personnel and ownership) from the time he set up an IRA. As a result, a beneficiary document may be difficult to locate or authenticate. Lack of uniformity in the language of a beneficiary document may add to the uncertainty, as there is no specified official form for beneficiary designation and terminology varies.

In addition, what may have been appropriate in beneficiary designation at inception is probably not applicable today. For example, following Letter Ruling 200036047, an IRA may now be divided into a number of separate units without having to form a separate trust for each beneficiary. This change makes it more efficient to distribute an IRA to multiple beneficiaries (e.g., children or grandchildren). The goal is to spread contributions over the life expectancy of each.(Under Sec. 401(a)(9), a taxpayer must, of course, initiate such a choice before required distributions are made.)

Such an arrangement has profound economic and tax benefits. It avoids "bunching" the taxability of a...