Case Study: The Cost of an Outdated IRA Beneficiary

Life changes — and your estate plan should too

We know life keeps changing — new family members are born, others pass away, and relationships evolve. That's why it's so important to keep your IRA beneficiary designations current. Whether it's a marriage, divorce, or just a change of heart, updating your choices ensures your retirement assets go to the people you care about most. Since these assets often make up a big part of your estate, taking a moment to consider how you want them passed on can give you peace of mind, knowing your loved ones will be taken care of just as you wish.

Background

This real-life example comes from the personal experience of one of our contributors, whose mother’s estate highlighted how easily an overlooked beneficiary designation can impact both heirs and charitable intentions. 

An IRA owner, a 98-year-old widow, had a clear vision for how she wanted her modest estate distributed. Her will named her two sons as primary beneficiaries and designated two charities to each receive a small percentage of her probate estate.

She also owned a Traditional IRA and named her sons as equal (50/50) beneficiaries. This decision seemed reasonable—after all, non-probate assets like IRAs can transfer directly to named beneficiaries without waiting for the estate to go through probate.

However, what appeared simple on paper led to unexpected tax consequences and unnecessary complexity after her passing.

The issue

Traditional IRAs are funded with pre-tax dollars, meaning distributions are generally taxable as “income in respect of a decedent.” Each son, as an individual beneficiary, would owe income tax on any withdrawals at his own marginal rate.

Had the IRA instead been left directly to the charities, each organization could have taken a lump-sum distribution without any income tax liability. The widow’s charitable goals would have been fulfilled efficiently — and her heirs’ taxable income would have been reduced.

Unfortunately, her estate plan didn’t take this into account. The oversight likely stemmed from a lack of coordination between the estate plan and her IRA designations.

The options

After their mother’s death, the two sons faced several less-than-ideal options to align the outcome with her charitable wishes:

• Both brothers disclaim the IRA assets.
  The disclaimed funds would flow into the probate estate, allowing the executors to fulfill the charitable gifts. However, since IRA distributions would still be taxable to the estate’s beneficiaries, the brothers would retain most of the tax burden.
• One brother disclaims his share.
  The younger brother disclaims his portion of the IRA, so the entire IRA passes to the older brother as the only remaining primary beneficiary. Since the older brother has reached age 70½, he can use a qualified charitable distribution (QCD) to donate to the two charities (up to $108,000 for 2025). This arrangement requires complete trust by the younger brother and assumes that the gift to charity falls within the QCD limit for the year.

• Both brothers disclaim, and the custodian establishes inherited IRAs for the charities.
  This approach allows the charities to receive the assets directly from the IRA custodian, which issues Form 1099-R for tax reporting purposes. However, not all custodians support this option. STRATA does support charitable distributions of this nature, helping ensure assets are transferred efficiently and in alignment with the IRA owner’s intent.

   

Practical lessons learned

Especially as IRA owners age and begin consolidating their retirement plan assets, careful planning and execution become increasingly important. Whether the estate plan is for you or a loved one, consider consulting legal and tax experts who ask the right questions about overall objectives and clearly explain important planning options. Here are a few items to keep in mind as you prepare.

Key takeaways:

• IRA beneficiary designations override wills. Keeping both up to date ensures assets transfer as intended and typically avoids probate delays. This often simplifies distributions and speeds up the estate settlement process.
• IRA beneficiary designations should reflect and support the overall estate plan. These designations should not be made in a vacuum.
• Creating separate IRAs for specific charities may make sense. As retirement plan balances change or as charitable inclinations evolve, assets can be transferred in or out to accomplish desired results.

• And of course, regularly reviewing IRA beneficiary designations will help ensure that IRA owners don't leave unwelcome surprises for their loved ones.

   

Best practices for beneficiary designations

At STRATA, we believe that thoughtful planning can make all the difference in avoiding unnecessary complications. Our goal is to help you navigate the world of IRAs with confidence. While STRATA does not provide tax, legal, or accounting advice, our team of self-directed IRA experts is committed to sharing their knowledge and helping you make informed decisions.

Regularly reviewing and updating your beneficiary designations helps ensure your IRA assets are distributed according to your wishes. Consider these best practices:

• Review designations after major life events such as marriage, divorce, births, or deaths.
• Coordinate IRA designations with your overall estate plan to ensure consistency between your IRA and other estate documents.
• Name both primary and contingent beneficiaries to prevent delays in asset distribution.
• Consult qualified legal and tax professionals for guidance on complex family or charitable arrangements.

Resources

To submit a new beneficiary designation—or update an existing one—complete the Beneficiary Designation/Change form available on our website. You can also explore STRATA’s Self-Directed IRA Knowledge Center for step-by-step guidance, FAQs, and educational resources about beneficiary designations and other IRA topics. 

For beneficiaries managing this process, STRATA’s Beneficiary Resources provide helpful information and forms to ensure a smooth transition of IRA assets in accordance with final wishes.

Thoughtful preparation today helps ensure your legacy is handled with care tomorrow.