For most advisors, “Let's look at your IRA beneficiaries” is about the 39th step in the financial planning process — if it gets addressed at all. Worse yet, most clients are not even aware who will inherit their IRAs (some divorced individuals, for example, are unintentionally going to make the “exes” doubly happy by passing away).

Examining your clients' IRA beneficiary designations initially and periodically is good practice. But it should go beyond just i-dotting and t-crossing. A five-minute conversation could lead to millions more for the clients' descendants, and introductions to dozens of potential new clients for you.

The Rule

Typically, a single older client will name his adult children as beneficiaries of his IRA. When he dies, the required minimum distribution (RMD) from the IRA is based on the IRS life expectancy of the oldest beneficiary. A 50-year-old beneficiary, for example, would have to withdraw at least 3 percent of the account value in the year after his parent dies, 3.1 percent in the next year, etc., until the IRA would theoretically be depleted by the time the beneficiary reached his mid-80s.

But if your client has established a grandchild as a contingent beneficiary of the IRA, the adult child can choose to disclaim the IRA. Then the account would be passed on to the grandchild, and the new RMD is based on the grandchild's much-longer IRS life expectancy.

Why would a parent choose to disclaim the IRA inheritance? At least two reasons:

  1. His net worth is already high enough to be subject to estate taxes, and any amount he inherits will just add to the problem.

  2. He realizes he can save his family six to seven figures by having the money withdrawn over his child's life expectancy, rather than his.

The Difference

Scenario: You have a 75-year-old widow with $100,000 in her IRA, her son is 45 and his daughter is 10. Suppose the grandmother dies at 80 with the son as the sole beneficiary. The account earns 8 percent per year. If the son takes just the RMDs, the account balance will peak in 2032 at about $240,000. He'll get about $617,000 in total distributions before the account is depleted when he turns 84.

Now let's say your foresightedness led your client to add her granddaughter as a contingent beneficiary, and the son disclaims the IRA upon his mother's death. Using the same scenario, the girl will have a tax-sheltered account balance of $428,000 in 2032, a 78 percent increase over what it would have been in that year under her father's RMD. And by the time the little girl has reached the age of 82, she will have withdrawn almost $4.6 million from her inherited IRA — seven times what her father could have taken out.

No Risk?

Rarely in the investment business does such a wonderful opportunity come at so little cost. But since your client can change primary and contingent beneficiaries at any time during her life, with no input from any of the interested parties, there is little reason not to give the next generation the chance to take a “pass” on the IRA

To make this all come about, you and your client need to take two tiny-but-crucial steps right now:

  1. The contingent beneficiary needs to be put in place before the IRA owner dies.

  2. If the IRA owner is leaving the account to more than one person, the account should be split up before the owner's death; otherwise, when the owner dies the money must be withdrawn according to the life expectancy of the oldest beneficiary.

Spend the next few days calling your older clients who have IRA accounts, and ask if they would like to hear how they could forever change their grandchildren's lives — with little friction and hardly any cost. Once you have established contingent IRA beneficiaries, offer to contact the clients' next generation to explain what you've done and why you did it. In this context, it is highly likely that your clients' heirs will be glad to hear from you.

For your boomer and younger clients, find out if their parents are alive, and if so, ask if they have mentioned plans for leaving any IRA accounts. Suggest a three-way meeting to discuss the beneficiary options available — and it's likely that you'll end up with the account well before the older generation passes away.

Curing Youthful Impatience

Key strategies for smoothing the transition of money from one generation to another.

When alerted to the “stretch” IRA strategy, your average curmudgeon will point out that these big numbers will never materialize if the grandchild cashes out of the IRA at the earliest opportunity. Here are a few barriers that will prevent a young beneficiary from killing the golden goose:

  1. For IRAs worth at least $100,000, it's worth the trouble to use a trust to limit the kid's discretion over the amount withdrawn.

  2. For less cost and hassle, certain IRA custodians will allow restrictions to be placed on withdrawals from inherited IRAs.

  3. In the “Thank Heavens for Taxes” department, even the most immature young adult will pause when told that the IRS will take about 40% of his inheritance if he takes an immediate lump-sum distribution.

Writer's BIO: Kevin McKinley is a CFP and vice president of investments at a regional brokerage and author of Make Your Kid a Millionaire — 11 Easy Ways Anyone Can Secure a Child's Financial Future.