IRA Beneficiary Designation Forms

For the financial professional's reference bookmark folder

(Image: Thinkstock) (Image: Thinkstock)

Here is something to important to know about the beneficiary selections for an individual retirement account (IRA): The beneficiary designation form on file with the plan administrator or custodian will govern ownership and distribution of the plan/individual retirement.

Not the client’s will or trust.

(Related: 12 Key Factors for Blended Families in IRAs, Qualified Retirement Plans

All plan administrators and IRA custodians have pre-printed beneficiary designation forms that usually must be used.

However, there are three main points to consider here:

  1. One must compare what the provided form stipulates with the client’s wishes. Often, what the form provides is different or even contrary to what the client wants.

  2. The beneficiary designation forms can be modified by simply typing in “see attached” where a form asks for the names of the beneficiaries, and attaching beneficiary designation language that the client wants. This is the only way to be as certain as possible that the plan administrator or IRA custodian will do what the account holder wants at the right time.

  3. It is important to remember that the qualified plan administrator and IRA custodian are only thinking of their own best interests in designing these beneficiary designation forms. In other words: How to maximize the ease of administration. Most of the forms could be a lot more customer-friendly.

There is a big distinction between “per stirpes” and “per capita” in the law of descent and distribution.

The term “per stirpes” means by root, while the term “per capita” means by heads.

For example, if Steve has three children, Ed, Marty and Jay, and Steve leaves his estate to the children, by heads, what happens to Ed’s share if he dies before Steve? The answer is that his share is then divided between Jay and Marty, and Ed’s children get nothing.

This is not what most clients want. What most clients want is a per stirpes distribution, so that if Ed predeceases Steve, but is survived by two children of his own, Ed’s children will inherit Ed’s share, in equal portions.

Vault (Photo: Thinkstock)

(Photo: Thinkstock)

You might think that major IRA custodians and qualified plan administrators would provide for per stirpes distribution as the default rule, but this is not the case. It is extremely rare to see an IRA or qualified plan beneficiary designation form that uses a per stirpes distribution, despite that this is what most clients want.

Therefore, the estate planner must be intimately familiar with the beneficiary designation form of the particular provider or administrator and make the necessary changes to the form. It also is true that the beneficiary designation forms of the qualified plan administrators and IRA custodians are anything but standard or uniform. Therefore, one should never assume that the beneficiary designation form of, e.g., Wells Fargo is the same as the beneficiary designation form of, e.g., Fidelity, because those forms are different, often very different.

How do the forms for some of the major IRA custodians differ?

For starters, they differ significantly where the intended beneficiary predeceases the account holder. Some of these IRA custodians divide the predeceased beneficiary’s share equally among the surviving beneficiaries, while other custodians provide for pro rata sharing, e.g., if Steve left half of his IRA to Joanne and divided the remaining half between his sons, Ed and Jay, Joanne would take 2/3 of the share of the predeceased Ed because her share (50%) was twice as large as Jay’s share (25%). In the equal sharing scenario, Joanne and Jay would split Ed’s 25% share, 12.5% apiece.

This is a significant issue, but it begs the question of whether Steve wanted Ed’s children to have Ed’s share. In the typical parent/children scenario, it is our experience that parents overwhelmingly want to give the share of a predeceased child who left descendants behind to those descendants, i.e., the client’s grandchildren/great-grandchildren.

Nevertheless, this is not how any of the listed IRA custodians arranged their beneficiary forms. Therefore, it is incumbent upon the estate planner to apprise the clients of this issue and to help them modify the beneficiary designation form so that it aligns with their wishes.

Dollar puzzle (Image: Thinkstock)

(Image: Thinkstock)

IRA custodians also differ significantly in the selection of a successor beneficiary where the account holder failed to name a successor beneficiary, and the primary beneficiary either predeceased the account holder or disclaims the beneficial interest.

Some IRA custodians default to the account holder’s estate, which is not a designated beneficiary under the RMD rules, meaning that the five-year rule applies, which is not optimal in most situations.

However, a few of the IRA custodians do default first to the account holder’s spouse before defaulting to the account holder’s estate, which gives many more options for taking out distributions, as we discussed earlier in this chapter.

Finally, some IRA custodians also include the account holder’s parents before defaulting to the account holder’s estate.

IRA custodians can differ sharply in what happens where none of the named beneficiaries are deemed to survive the account holder or where there is no beneficiary designation form on file with the IRA custodian.

One of the listed IRA custodians still defaults to the account holder’s estate, while the majority interpose the account holder’s spouse, children and/or parents as beneficiaries, but these are not uniform either, so caution is advised. There is no substitute for reading and understanding the form’s default provisions so that appropriate changes can be made, and the client’s beneficiary designation form can be customized to his or her desires.

The safest route is to affirmatively provide for the beneficiary(ies) that your client wants, and to name successor beneficiary(ies) as well as provide what happens where a beneficiary predeceases the client or desires to disclaim.

This is easily done by simply typing “see attached” on the line that asks for the name(s) of the beneficiary(ies) and submitting a beneficiary designation provision that the client wants.

--- Read Addressing Beneficiaries in Estate Planning on ThinkAdvisor.


We have a
Facebook news feed. Visit https://www.facebook.com/ThinkAdvisorLifeHealth

This ThinkAdvisor story is excerpted from:

The above article was drawn from The Tools & Techniques of Estate Planning, 18th Edition, and originally published by The National Underwriter Company, a Division of ALM Media, LLC, as well as a sister division of ThinkAdvisor. As a professional courtesy to ThinkAdvisor readers, National Underwriter is offering this resource at a 10% discount (automatically applied at checkout). Go there now.

Page 1 of 3
Single page view Reprints Discuss this story
We welcome your thoughts. Please allow time for your contribution to be approved and posted. Thank you.

Most Recent Videos

Video Library ››