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.
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:
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.
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.
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.
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.