Skip to Content
Personal Finance

Planning for the Dementia Factor in Retirement

Consider these options if you think an IRA beneficiary may develop a mental disability.

Question: A practicing attorney asks, "I work with many seniors and often need to address dementia issues. Here is a typical situation:

John wants to name his wife Susan as the primary beneficiary of his IRA and to name their children as contingent beneficiaries. The expectation is that, upon John's death, Susan, as surviving spouse-beneficiary, would roll the IRA over into her own IRA, and name the children as beneficiaries of the rollover IRA.

But both spouses are concerned that following John's death Susan might have dementia, and not be legally competent to roll over the inherited IRA or file a new beneficiary designation. Is there a way that Susan can, now, prior to John's death, pre-elect the spousal rollover and name the children as beneficiaries of her (not yet created) rollover IRA? If that cannot be done, can John at least designate that benefits still in his IRA after Susan's death will pass to their children?"

Answer: Unfortunately, neither of these approaches will likely work.

IRS regulations specify that the spousal election to treat an IRA inherited from the deceased spouse as the surviving spouse's own IRA may not be made until after the death of the first spouse.

Furthermore, most IRA custodians will not allow the participant to name a "successor beneficiary." Once the participant dies, the primary beneficiary owns the inherited IRA absolutely, assuming he or she survived the participant and did not disclaim the benefits. The primary beneficiary is the only one who can name a successor beneficiary to take the account if the primary beneficiary, having survived the participant, dies while there is still money in the account. If the primary beneficiary fails to do that, the IRA documents' default beneficiary provisions would apply. Typically the IRA provider would have no way to go back to the original participant's account documents to see what he or she would have wished.

Here are the other ways to deal with a potential anticipated mental disability:

The Bronze Plan: Guardianship
If John and Susan do no advance planning to deal with the disability risk, and John dies at a time Susan is legally incompetent, a guardian could be appointed by the applicable state court to act for her with respect to the inherited IRA and her other property. That should enable the guardian to use the IRA assets for Susan's benefit.

But guardianship has serious limitations. The state court process may be public and costly. The court might or might not appoint the person Susan would have chosen as her legal guardian. Depending on state law, the guardian might not be able to take certain actions (such as "rolling over" the account) without court permission. It would be unusual for a guardian to have the power to name beneficiaries on Susan's behalf. Essentially, guardianship is the way to deal with disability--for people who didn't plan for that eventuality.

The Silver Plan: Power of Attorney
Susan could sign a durable power of attorney appointing a trusted person to act for her. Ideally I would like to see a separate power of attorney just dealing with retirement benefits. Whether it's a separate document or not, it should enumerate powers with respect to any retirement plan, including the powers to: withdraw from, contribute to, change the investments inside, receive all information regarding, and make all tax elections with respect to the account. The power should specify that the attorney can roll or transfer funds into or out of the account from or to another retirement account or plan. The power should direct the attorney to name John, if living, otherwise the children as beneficiary for any account.

While John and Susan are both alive and competent, they should make sure John's IRA provider will accept the power of attorney. Some financial firms require you to use their particular form or have other guidelines on this subject.

The Gold Plan: Trusteed IRA
Most IRAs are in the legal form of a "custodial account." A custodian has no power to make decisions about the account. A custodian merely safeguards the assets, keeps necessary records, and files required tax returns.

Alternatively, an IRA can be in the form of a trust--though this is less common, the trusteed IRA is perfectly legal and has exactly the same tax characteristics as a custodial IRA. If John's IRA were in the form of trusteed IRA (also called an "individual retirement trust" or IRT), there would be several advantages from the point of view of potential disability of either spouse:

  1. If John were disabled, the trustee could use IRA assets directly to pay bills on John's behalf and make sure the annual required distribution is distributed. An IRA custodian, by contrast, will only act on instructions with respect to any distributions.
  2.  After John's death, if beneficiary Susan is disabled, the IRA trustee can perform the same services on her behalf--pay expenses directly and distribute the required minimum distribution.
  3. The trustee of the trusteed IRA can assume full investment responsibility for the IRA assets. A custodian will never do this.
  4. Finally, John could provide in the trusteed IRA document for a "successor beneficiary" to Susan, if she should survive him and then later die while there was still money in the account. As noted, few if any custodial IRAs allow the participant to name a successor beneficiary.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.