If you leave your IRA to your son and daughter equally - 50-50 - what happens when one of them dies?
MarketWatch answered that question in its article, "Who gets your IRA when you die? It's not so simple." The answer to what happens to the IRA money, is dependent upon what the beneficiary designations say and when one of the children passes away. The beneficiary designations state how it will be distributed. However, that may not be what is written in your will.
If the children are alive when the IRA owner dies, and she simply named them 50/50 outright beneficiaries, they will each get half the funds. Each child could do whatever they wanted, including placing the funds in an inherited IRA account and naming their choice of beneficiaries.
However, if either child dies before the parent with the IRA passes away, and she doesn't update the beneficiary designation before she dies, there are two common default arrangements built into account forms for IRAs, retirement accounts, life insurance policies, annuity contracts and “transfer on death” arrangements available in some states. One isper capita: if one child is dead at the time of the parent's death and is still listed as a 50% beneficiary, then 100% of this share will go to the surviving child.
The other common arrangement is per stirpes—Latin for “by the root.” Here, rather than the predeceasing child's share going to their surviving sibling, the share goes to the deceased beneficiary's children.
Be sure to obtain a copy of what you filed for your beneficiary designations. You should carefully review the language to be certain that it meshes with your wishes. If you want your assets to flow differently, speak with an estate planning attorney about drafting a custom beneficiary designation. Some people don't want one of their beneficiaries to inherit outright and have free reign with the funds. An attorney can help protect that person and the money.
You may also want to include people not among your linear decedents, like spouses of children or grandchildren or family friends, as beneficiaries. You may also want to name trusts or charities as beneficiaries. These are also common reasons to consider a custom designation drafted by an experienced estate planning attorney.