1.4 Beneficiary Designations, Per Stirpes vs. Per Capita, and Disclaimers

Beneficiary Designations: Contractual Primacy and Hierarchy

An Individual Retirement Arrangement is a contractual agreement governed by federal tax statutes, state contract law, and the underlying custodial agreement (Form 5305-A or prototype). Consequently, IRA assets are non-probate assets that pass directly to designated beneficiaries by operation of contract upon the account owner's death.

The Contractual Supremacy Rule

A fundamental principle of IRA administration is that an executed, valid beneficiary designation form on file with the custodian supersedes any contradictory provisions in a Last Will and Testament, prenuptial agreement, or divorce decree (unless an exception applies, such as a state revocation-on-divorce statute that automatically revokes an ex-spouse's designation, upheld in Sveen v. Melin (2018), or a transfer incident to divorce completed under IRC § 408(d)(6); QDROs apply to employer plans, not IRAs). If a decedent's will states "I leave all my retirement accounts to my daughter," but the IRA custodial record names the decedent's brother, the bank custodian is legally bound by contract to distribute the funds exclusively to the brother.

Primary vs. Contingent Beneficiaries

• Primary Beneficiaries: Individuals, trusts, or entities with first-tier entitlement to inherit the IRA assets upon the account owner's death. Multiple primary beneficiaries can be designated, with shares expressed as percentages (which must total exactly 100%) or specific fractions.
• Contingent (Secondary) Beneficiaries: Second-tier beneficiaries who inherit IRA assets only if all primary beneficiaries predecease the account owner, or if all primary beneficiaries validly disclaim their entire interests. A contingent beneficiary receives nothing if even one primary beneficiary survives the owner (unless the designation form explicitly specifies otherwise).

Default Waterfall Provisions

If an IRA owner dies without a valid beneficiary designation on file—or if all named primary and contingent beneficiaries predeceased the owner—the assets pass under the default beneficiary provision of the institution's IRA agreement. The IRS model forms themselves contain no default-beneficiary language; institutions add it in Article VIII or in their prototype's general provisions.

A common institutional default follows this sequential hierarchy (always confirm the specific agreement):

1. Surviving Spouse: If the account owner is legally married at death, the entire account passes to the surviving spouse. The surviving spouse retains unique rights, including the ability to roll over the assets into their own IRA, elect to treat the IRA as their own under Treas. Reg. § 1.408-8, or remain a beneficiary under an inherited IRA.
2. Estate of the Deceased Owner: If the owner is unmarried, has no surviving spouse, or the spouse is deceased, the assets pass directly to the decedent's estate.

Operational Hazards of an Estate as Beneficiary

Distributing IRA assets to an estate triggers severe tax and administrative drawbacks:

• The assets become subject to probate court administration, incurring executor fees, probate delays, and exposure to general creditor claims.
• Under Treasury Regulation § 1.401(a)(9)-4, an estate is a "non-individual" and cannot qualify as a "Designated Beneficiary."
• If death occurred prior to the owner's Required Beginning Date (RBD), the entire balance must be fully liquidated under the restrictive 5-Year Rule (IRC § 401(a)(9)(B)(ii)).
• If death occurred on or after the RBD, distributions must occur over the decedent's remaining single life expectancy using the IRS Single Life Table, but the 10-year payout rule and Eligible Designated Beneficiary (EDB) lifetime stretch protections are forfeited.

Distribution Methods: Per Stirpes vs. Per Capita

When account owners designate multiple beneficiaries (such as children), they must elect how a deceased beneficiary's share will be distributed if that beneficiary predeceases the owner. The two primary legal mechanisms are Per Stirpes and Per Capita.

Per Stirpes ("By Representation" / "By Branch")

Per Stirpes is a Latin term meaning "by the roots" or "by representation." Under a per stirpes designation:

• If a named primary beneficiary predeceases the IRA owner, that deceased beneficiary's share does not lapse, nor does it transfer to the surviving primary beneficiaries.
• Instead, the deceased beneficiary's share passes down their specific ancestral branch to their lineal descendants (children, or grandchildren if children are deceased) in equal shares.

Per Capita ("By Head")

Per Capita means "by the head." In standard bank IRA administration, a per capita election operates as a pro-rata distribution among surviving named beneficiaries:

• If a named primary beneficiary predeceases the IRA owner, that deceased beneficiary's share lapses entirely.
• The lapsed share is divided proportionally among the surviving primary beneficiaries of the same class.
• The children or descendants of the deceased beneficiary receive nothing.

Comprehensive Worked Example: Per Stirpes vs. Per Capita

Consider an IRA owner, Margaret, who maintains a Traditional IRA with a custodial balance of $300,000. Margaret designates her three adult children as equal primary beneficiaries:

• Alice: 33.33% ($100,000)
• Bob: 33.33% ($100,000)
• Charlie: 33.34% ($100,000)

Two years prior to Margaret's death, Alice tragically passes away. Alice is survived by two children: Grandchild 1 and Grandchild 2. Bob and Charlie survive Margaret.

Distribution Calculation Under Per Stirpes

Under a valid per stirpes designation on file with the custodian:

1. Alice's 33.33% share ($100,000) does not lapse. It passes down Alice's branch to her surviving children in equal shares.
2. Grandchild 1 receives 50% of Alice's share: $50,000 (16.665% of the total IRA).
3. Grandchild 2 receives 50% of Alice's share: $50,000 (16.665% of the total IRA).
4. Bob receives his designated share: $100,000 (33.33%).
5. Charlie receives his designated share: $100,000 (33.34%).

• Result: Alice's family branch is fully preserved, and Margaret's grandchildren receive their mother's inheritance.

Distribution Calculation Under Per Capita (Surviving Named Beneficiaries)

Under a standard per capita designation (or a form that does not select per stirpes):

1. Alice's 33.33% share lapses because Alice predeceased the account owner.
2. Alice's two children (Grandchild 1 and Grandchild 2) receive $0.
3. The remaining $300,000 balance is divided proportionally between the two surviving named primary beneficiaries, Bob and Charlie:
   • Bob receives 50% of the total account: $150,000 (50.00%).
   • Charlie receives 50% of the total account: $150,000 (50.00%).

• Result: Alice's children are completely disinherited from the IRA, and Bob and Charlie receive a windfall.

Comparative Summary: Per Stirpes vs. Per Capita

Qualified Disclaimers under IRC § 2518

A beneficiary is not legally compelled to accept inherited IRA assets. A Qualified Disclaimer is an irrevocable, legally binding refusal by a beneficiary to accept an interest in property. Under IRC § 2518, if a beneficiary executes a qualified disclaimer, the disclaimed assets are treated for transfer, gift, and income tax purposes as if the disclaimant had predeceased the IRA owner.

Four Statutory Requirements of IRC § 2518(b)

To constitute a qualified disclaimer, four statutory conditions must be met:

1. Irrevocable Written Refusal: The disclaimer must be an irrevocable and unqualified refusal in writing, signed by the disclaimant (or their legal guardian) and identifying the specific IRA interest or fraction disclaimed.
2. Strict Nine-Month Delivery Deadline: The written disclaimer must be delivered to and received by the IRA trustee or custodian no later than nine (9) months after the date of death of the account owner.
   • Crucial Rule: This 9-month deadline cannot be extended for any reason—not by probate extensions, estate tax return extensions, or state court orders. (The sole exception applies to minor beneficiaries, who have until 9 months after reaching age 21 to disclaim).
3. No Prior Acceptance of Benefits: The disclaimant must not have accepted the disclaimed interest or any of its benefits prior to executing the disclaimer.
   • Operational Disqualification: Accepting benefits (for example, cashing a distribution or exercising control over the inherited assets) forfeits the right to disclaim the accepted portion. Rev. Rul. 2005-36 provides important relief: a beneficiary who takes the year-of-death RMD can still make a qualified disclaimer of the remaining balance, but not of the RMD amount received and the income attributable to it.
4. Passage Without Direction: The disclaimed interest must pass without any direction on the part of the person making the disclaimer.
   • The disclaimant cannot say, "I disclaim in favor of my brother" or "I disclaim to charity." The assets must pass strictly in accordance with the deceased owner's original beneficiary designation (e.g., to the contingent beneficiaries or per stirpes issue) or the custodial agreement default waterfall.

Partial Disclaimers

Under Treasury Regulation § 25.2518-3, a beneficiary may execute a partial disclaimer of an IRA, disclaiming a specific dollar amount or a distinct percentage (e.g., disclaiming 40% of their share while retaining 60%). The custodian must establish a separate inherited IRA for the disclaimed portion and assign it to the successor beneficiary.

Trusts as Beneficiaries: Look-Through (See-Through) Rules

Account owners frequently designate a trust as their IRA beneficiary to protect assets from creditors, manage spendthrift heirs, or provide for minor or special-needs individuals.

Because an ordinary trust is a non-individual entity without a natural life expectancy, designating a trust would normally trigger non-designated beneficiary treatment (the 5-year rule or decedent's remaining life expectancy). However, under Treasury Regulation § 1.401(a)(9)-4, if a trust satisfies the "See-Through" (or "Look-Through") Trust Rules, the IRS looks through the trust entity to treat the underlying individual trust beneficiaries as the beneficiaries of the IRA.

Four Statutory See-Through Trust Criteria

To achieve see-through status, the trust must satisfy four requirements:

1. Valid Under State Law: The trust must be a valid trust under applicable state law (or would be valid except for the fact that there is no trust corpus).
2. Irrevocability: The trust must be irrevocable, or become irrevocable upon the death of the IRA owner. (Standard revocable living trusts satisfy this criterion because they become irrevocable upon the grantor's death).
3. Identifiable Beneficiaries: The beneficiaries of the trust who are beneficiaries with respect to the trust's interest in the IRA must be identifiable from the trust instrument.
4. Documentation Requirement: For qualified plans, the trustee must furnish trust documentation to the plan administrator by October 31 of the year following the year of death (Treas. Reg. § 1.401(a)(9)-4(h)). For IRAs, the 2024 final regulations remove this step: Treas. Reg. § 1.408-8(b)(4)(ii) states that the trust documentation need not be provided to the IRA trustee, custodian, or issuer. Many IRA custodians still request a trust copy or certification to administer the account correctly, but that is institutional practice, not a regulatory deadline.

Conduit Trusts vs. Accumulation Trusts

The Treasury Regulations distinguish between two structural categories of see-through trusts:

• Conduit Trusts: The trust agreement strictly mandates that any distribution paid from the IRA to the trust must be immediately distributed ("passed through") to the individual income beneficiary. No IRA funds may be accumulated or retained inside the trust. In a conduit trust, only the primary income beneficiary is counted for RMD purposes; remainder beneficiaries are disregarded.
• Accumulation Trusts: The trust agreement grants the trustee discretionary authority to retain and accumulate IRA distributions inside the trust corpus for future distribution. Because accumulated funds may eventually pass to successor beneficiaries, countable remainder beneficiaries must be analyzed under the RMD rules (the 2024 regulations let certain remote contingent beneficiaries be disregarded). If a countable beneficiary is a non-individual (such as a charity or the grantor's estate), the IRA is treated as having no designated beneficiary: the 5-year rule applies if the owner died before the RBD, or the owner's remaining life expectancy applies if death occurred on or after the RBD. (SECURE 2.0 allows a charity as remainder beneficiary of an applicable multi-beneficiary trust for a disabled or chronically ill beneficiary.)

The SECURE Act Impact on Trust Beneficiaries

Under the SECURE Act and the 2024 final Treasury regulations, most designated trust beneficiaries are subject to the 10-Year Rule. Lifetime stretch distributions through a trust are permitted only if the trust beneficiary qualifies as an Eligible Designated Beneficiary (EDB)—specifically:

• A surviving spouse;
• A minor child of the account owner (until reaching age 21, at which point the 10-year clock begins);
• A disabled individual (under IRC § 72(m)(7));
• A chronically ill individual (under IRC § 7702B(c)(2)); or
• An individual not more than 10 years younger than the deceased account owner.

Practical Administrative Scenario: The Disputed Beneficiary File

Robert dies on March 15, leaving a Traditional IRA valued at $500,000 at a commercial bank. Robert's son, Kevin, arrives at the bank branch presenting Robert's Last Will and Testament, dated one year prior to death. The will explicitly states: "I give my entire bank IRA to my son Kevin."

The bank's CISP-certified IRA operations specialist reviews the bank's records repository and discovers an executed Form 5305-A Adoption Agreement dated five years prior to death. The beneficiary designation section names Robert's daughter, Sarah, as the sole 100% primary beneficiary, and Kevin as the contingent beneficiary.

The specialist manages the case under bank compliance protocols:

1. Contractual Primacy: The specialist explains to Kevin that an IRA is a non-probate asset governed by contract law. The valid beneficiary designation form on file supersedes the provisions of Robert's will.
2. Sarah's Options: Sarah is entitled to the full $500,000 as the sole primary beneficiary. She can open an Inherited IRA and take distributions under the SECURE Act 10-year rule.
3. The Disclaimer Option: Sarah informs the bank that she is financially secure and wishes for Kevin to receive the funds. The specialist explains that Sarah cannot assign or gift the IRA directly to Kevin. Instead, Sarah can execute a Qualified Disclaimer under IRC § 2518.
4. Disclaimer Execution: Sarah executes an irrevocable partial or full disclaimer in writing and delivers it to the bank on November 10 (less than 8 months after Robert's death). Sarah has taken no distributions and accepted no benefits.
5. Reallocation to Contingent Beneficiary: Upon receipt of the valid disclaimer, Sarah is legally treated as having predeceased Robert. The account passes automatically to Kevin, the named contingent beneficiary. The bank establishes an Inherited IRA for Kevin's benefit, fully satisfying all Internal Revenue Code and custodial contract mandates.