UTMAs and Beneficiaries

Q. My wife and I have IRAs and 401(k)s. We are each other's primary beneficiary. My 2 sons (both under 18) are the equal contingent beneficiaries. Let’s say my wife and I die at the same time (car crash), and my sons get everything. Since they are minors, how is the UTMA set up and how many will have to be set up, and by whom - the guardian, who picks the guardian if we didn't choose one. How do we choose one before we die? If the 401k requires a full payout in 5 years (no stretch?), what happens to the money, does it get distributed to the minor and taxed at his tax rate, or does it stay in the trust and taxed at trust rates? Does the trust have to dissolve at age 18 (or 21 in some states), and everything goes directly to the beneficiary.

For the IRA, it can be stretched even though it will be a UTMA? If yes, will the UTMA make it past 18?

Any help will be appreciated.


A. I'm not sure I'll be able to answer all of your Q's, but let's give it a try...

IRAs that your minor children would inherit probably would not be considered UTMA accounts. It is important that your children have a guardian and there is a Guardianship document you can use to name one with alternates before you die. Many people also name the guardian in their Will or Living Trust.

When a non-spouse beneficiary inherits an IRA, it is referred to as an Inherited IRA and the decedent's name must be in the title of the account.

For example: "John Doe IRA (deceased March 30, 2005) F/B/O John Doe II, Beneficiary"

If the child was a minor then I would think it would be: "John Doe IRA (deceased March 30, 2005) Maggie Smith, Custodian F/B/O John Doe II, Beneficiary"

You should verify this with a competent tax attorney, but the IRS does not state specific language for titling Inherited IRAs.

A 401(k) would be paid out to a custodial account for benefit of the child. It think it
would be taxed at the child's rate unless there is one parent still living. In that case the distributions would probably fall under the Kiddie Tax provisions. (If child over 14 then taxed at their bracket, prior to 14, $1600 taxed at child's rate, rest at parents).

Any custodial (UTMA,UGMA) account automatically gets controlled in it's entirety by the child when he or she turns 18. The only way to prevent this would be to have a trust set up fbo the child and make the trust the beneficiary of the IRA/401(k). In that case it would be taxed at trust rates and might not be eligible for stretching.

Your posted comments on this and other questions are welcome.
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