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IRAs for many heirs
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May 15, 2000: 1:40 p.m. ET
Expert recommends setting up different accounts to best serve siblings
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NEW YORK (CNNfn) - If your dad leaves his IRA to you and your brothers and sisters, you might be wondering what the rules are about taking dividing up the money.
In response to a reader's question, Donald Boegel, a certified financial planner from Plymouth, Minn., and a member of the Financial Planning Association, said some distribution rules might be costly for younger siblings.
Ask the experts a question.
I understand there are different options for a beneficiary to take distributions on an IRA. But what happens if there are multiple primary beneficiaries? Does each beneficiary have a choice or does the same choice have to be made by all beneficiaries?
The distribution rules pertaining to IRA beneficiaries can be quite confusing. These rules make planning for this similar to taking a walk in a minefield. I'll start with some basic information about these rules and then outline some procedures that if followed correctly, could prevent the ultimate beneficiaries from being subject to explosive tax consequences later on.
When an IRA owner dies before April 1 of the calendar year after he or she turns 70-1/2, the owner's beneficiaries other than a spouse have two choices; they can spend the IRA within five years, or they can elect to take distributions over their life expectancies. A surviving spouse may roll the decedent's IRA into his or her own IRA, or leave the IRA in the decedent's name. Beneficiaries who aren't spouses often take distributions quicker than they have to.
When an IRA owner names a non-spouse beneficiary, that beneficiary is assumed to be (at most) 10 years younger than the owner for purposes of calculating joint life expectancy. This 10-year rule applies while the IRA owner is alive, but ceases upon death. So, if Dad is 70 and he names his 40-year old daughter as beneficiary, their joint life expectancy is 42.9 years. When Dad dies, the daughter can take distributions over her remaining life expectancy. This means years and years of tax deferral and ultimately greater sums of money for her.
If multiple beneficiaries are named, this can be very costly for the youngest ones. That's because, if the IRA owner names a spouse and child as beneficiaries, the child will be forced to take accelerated distributions. The distributions have to be made over either the five years, or the life expectancy of the oldest beneficiary.
If the IRA owner would like their account to be divided equally among several beneficiaries, I would recommend establishing separate IRA accounts for each one individually. This will allow the youngest to take advantage of their longer life expectancy. As owner of the IRA, you can always change the beneficiary later. However, any changes after Required Minimum Distributions have begun cannot reduce those payments.
Considering IRA accounts represent, in many cases, the most significant asset one has at retirement, careful consideration must be made when designating beneficiaries. After an IRA owner dies, the beneficiaries really have little control, other than the above-stated options. If there are multiple beneficiaries including the spouse, the portion going to the spouse may be available for planning purposes. That is, the spouse may be eligible to roll his or her portion into his or her own IRA and subsequently structure that beneficiary arrangement according to his or her wishes.
Also, many beneficiaries of IRA distributions forget (or aren't aware) that they may have a substantial income tax deduction as a result of estate taxes and income in respect to a decedent. 
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