When it comes to inheritance, IRAs can be a bit tricky. In most cases, the IRA owner directs succession by naming primary and secondary beneficiaries on a beneficiary form. Any of these beneficiaries can choose to disclaim the inheritance, but the results of that refusal can vary depending on who the beneficiary is and how the form was filled out (or not).
Pre-Death Spousal Waiver
If you are married, your spouse essentially has the right of first refusal on your IRA savings. If you know in advance that you want to pass your IRA directly on to someone else -- a child, for instance -- a spousal waiver is required. Fortunately, it's very easy to do. Simply fill out your IRA beneficiary form with the name of your desired beneficiary(ies) and have your spouse sign off where indicated. This remains in effect until you change the designation or die, whichever comes first.
When an heir or other beneficiary refuses an inheritance, it's called "disclaiming." But if you disclaim an IRA, you also release your right to say what happens to the money. You don't have to refuse the entire inheritance, though -- you can keep part of it and let the rest go. Whatever portion of the account you disclaim is treated as though you had died prior to the IRA owner, and follows the IRA rules of succession. Beneficiaries must specifically disclaim their inheritance in writing, no more than nine months following the death of the IRA owner.
Rules of Succession
IRAs typically have a primary beneficiary and a secondary, or contingent beneficiary. Sometimes there is more than one beneficiary at either level. If a primary beneficiary disclaims her portion of the IRA, two things can happen. If the IRA owner made a "per stirpes" designation, the beneficiary's portion of the IRA passes in equal portions to her heirs, usually a spouse or child. If there are no heirs or there is no "per stirpes" designation, the IRA goes in full to the other primary beneficiaries. If there are no other primaries, it passes to the contingent beneficiaries. If the IRA owner did not have a beneficiary form, the probate court decides succession, and it may or may not follow the owner's will.
It's worth noting that spousal beneficiaries of IRA owners have special privileges. Rather than treating the IRA as an inherited account -- and taking required distributions -- a spousal beneficiary can elect to treat the IRA as his own. This means that the IRS treats the inherited account balance as if it always belonged to the spouse, and he can make a new beneficiary form. Upon death, the inherited IRA follows the new beneficiary form or probate court rulings designating the spouse's heirs.