Distribution of your IRA after your death should be determined by a beneficiary designation form prepared by you, the account owner. It is not governed by your Last Will and Testament (unless you fail to prepare a beneficiary designation form because often your "probate estate" is the default beneficiary in accordance with the provisions of the agreement that underlies the IRA arrangement).
You don’t want your probate estate to be the beneficiary of your IRA because it defeats much of the tax deferral benefit of a properly distributed IRA and it may subject the IRA assets to creditor claims.
It is extremely important that you properly and completely prepare the beneficiary designation form for your IRA, meaning that you identify both primary and contingent beneficiaries.
If you name minors as beneficiaries of an IRA (such as your minor children, grandchildren or nieces and nephews), then serious complications can arise because minors cannot “own” property in most states.
You need to ask your IRA custodian how it would handle the assets if it is your wish that the assets be distributed to a minor, even if the minor is only a contingent beneficiary. You may be able to name a custodian or guardian on the IRA beneficiary designation form but you must first check with your IRA custodian.
If you have a Last Will and Testament that creates a testamentary trust for a minor child whom you are naming as a beneficiary of your IRA, then you should name that trust as the beneficiary with specific reference to the minor child as the beneficiary. Your IRA custodian (or your estate planning attorney) should be able to help you with the proper wording.
If you have a substantial IRA that might be distributed to a minor, it is best to use the testamentary trust approach because with the custodian approach, the minor will have complete access to the IRA asset when the beneficiary turns 18 and might just squander the asset.
What happens if you do nothing and a minor is the named beneficiary of an IRA account? Your loved ones may be saddled with the costly and time consuming process of having a guardian appointed through the courts of the jurisdiction where the minor resides. It's easy to avoid this unattractive outcome, however, by simply contacting your IRA custodian and discussing the situation with a knowledgeable person who can help you properly word the beneficiary designation form. If your IRA custodian (or your benefits administrator or your financial advisor) then a knowledgeable estate planning attorney should be able to assist.
