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RETIREMENT FUNDS AND THE IMPORTANCE OF “PER STIRPES”

I always recommend that the owner of retirement funds (“the owner”) name primary and contingent beneficiaries for each fund. Retirement funds can be identified in your portfolio because it can never be held jointly with another person (even your spouse); and, if you are older than 70 ½ you will have to begin taking your Required Minimum Distributions, RMDs. Upon the death of the owner, without the necessity of probate, the named beneficiaries can open up their own inherited IRA account and request the transfer of the beneficiary’s share of the owner’s account into the beneficiary’s new retirement account. The beneficiary of the inherited IRA will have to begin taking RMDs at year one, but can continue to enjoy tax free growth.

If the owner fails to name a beneficiary, the retirement account will have to be probated. The probate process requires that the retirement fund be liquidated, which in turn triggers the withholding of approximately one-third of the retirement fund, leaving the beneficiaries of the owner’s estate the remaining two-thirds. The beneficiaries of the owner’s estate are those named in the owner’s Will; or, a genealogy of the owner’s family tree if the owner died without a Will. Probate, the loss of funds and/or the net proceeds going to strangers can all be avoided by naming beneficiaries for each retirement account. Review your beneficiary designations for each retirement fund frequently.

If choosing to name more than one beneficiary, you must choose between “joint” or “per stirpes.” Let’s say Mr. Green names his spouse the primary beneficiary and his three children his contingent beneficiaries. Let’s assume at Mr. Green’s death, his spouse and one of his three children have died before him. If he named the three children “jointly”, only the two surviving children will inherit. If he chose “per stirpes”, the child(ren) of the deceased child will “stand in the shoes” of their parent (Mr. Green’s child), equally sharing the one-third. For more information, jlawma.com or 413-532-1200.