by Denise Appleby CISP, CRC, CRPS, CRSP, APA
Designating a beneficiary is one of the most important administrative steps that should be taken with retirement accounts. Failure to designate a beneficiary can result in retirement assets being passed on to a party that the account owner ( individual) may not want to receive the assets, and create discontent among survivors. In this article, we provide some guidelines on beneficiary designations that can help to ensure that retirement assets are passed on to the right person.
A Will May Not Cover A Retirement Account
If an individual designated his/her Will as the beneficiary, including stating “As per my Will” or “Will” on his/her designation form, the designation should be updated so that it makes specific reference as to the identity of the beneficiaries. Most IRA custodians and plan administrators will not accept designations of “My Will” or “As per my Will”. Further, even if the beneficiary form was received and placed on file, this does not mean that it meets the custodian/administrator’s requirements, as some documents do ‘fall through’ the quality-control cracks. The issue would then become apparent only when the beneficiary comes forward to claim the assets, resulting in frustration for everyone involved.
Because assets in an IRA, qualified plan, 403(b) arrangement or 457(b) plan are not considered probate assets, they are not usually subject to the terms of a Will. Instead, the beneficiaries of these assets are determined by the beneficiary designation form or the default-provisions of the plan document. Should the individual include stipulations in his/her Will that contradicts the beneficiary designation form, and/or the terms of the retirement account’s plan document, it is very likely that provisions in the Will would not be honored by the custodian/trustee. Should the beneficiaries choose to pursue having the terms of the Will apply to the retirement account; it may mean legal fees to hire an attorney, and the matter being referred to court.
Unless the Will makes specific reference to the retirement account, and provide explicit instructions as to who is the beneficiary of these assets, the judge may find it difficult to have it apply to the retirement account. And even if it does include specific and explicit instructions, there is still no guarantee that the judge would make a ruling to have it apply to the retirement account.
Consider A Customized Designation Instead
If the individual wants to make a beneficiary designation for which a ‘fill-in-the blank’ form does not suffice, he/she should check with the custodian or administrator to determine if they will accept a customized beneficiary designation which would allow the individual to include contingency provisions. An increasing number of custodians and plan administrators are accepting these customized beneficiary designation forms, as they come to realize that with retirement accounts being the largest asset for many individuals, sophisticated designations are becoming a necessity.
Be Aware of Default Beneficiary Provisions
Retirement plan documents usually include default beneficiary provisions that apply in the event the retirement account owner fails to designate a beneficiary, or if the designated beneficiary predeceases the retirement account owner. For qualified plans and 403(b) arrangements, the spouse is usually the default beneficiary for married participants and their estates for unmarried participants. For IRAs, the default beneficiary differs among custodians. The more estate planning-friendly documents include default provisions, such as the following:
- The spouse is the default beneficiary
- If there is no surviving spouse, then the children of the decedent is the beneficiary. Some also include Per Stirpes or Per Capita provisions
- If there is no surviving spouse and no surviving children, then the estate is the beneficiary.
On the other hand, there are some IRA documents for which the estate is the only default beneficiary.
Regardless of whether the document includes a favorable default beneficiary provision, the individual should provide a written designation, for the following reasons:
- The default provisions may not be consistent with the individual’s preference
- The default provisions may have changed since the individual established the account, and the new document could provide that either of the default provisions (before or after the change) apply to accounts where the owners failed to affirmatively designate beneficiaries
- If the individual divorces and remarries, and the account was established during his/her previous marriage, there could be confusion as to whether the beneficiary is the individual’s former spouse or surviving spouse
A written beneficiary designation will help to avoid any confusion, and make it easier for survivors to determine the beneficiary(ies) of the retirement account/s.
Update Beneficiary Designations for Relationship Changes
If the individual or his/her beneficiaries experience changes in their relationships, and these changes affect the beneficiary designation, it should be updated to reinforce or change the designated beneficiary accordingly. The following are some examples:
The individual Gets Married, Remarried, or Divorced
If the individual gets married, remarried or divorced, the beneficiary designation should be checked to ensure that the right person is designated. There have been many instances where former spouses and surviving spouses have had to spend time and money in court to have a determination made as to whether the former or surviving spouse is the beneficiary of a decedent’s retirement account. If the individual’s former spouse was the designated beneficiary and the individual wants him/her to remain as the beneficiary, he/she should complete a new beneficiary designation form to reinforce intent. This is necessary as some documents as well as some state laws provide that divorce results in an automatic revocation of a beneficiary designation. Completing a new beneficiary designation form also serves to remove any doubts as to the intent of the retirement account owner. If the individual does not want his/her former spouse to remain as the beneficiary, he/she needs to complete a new beneficiary designation form, so as to demonstrate to the former spouse that he/she has no right to the assets.
Beneficiary Predeceases Account Owner
If the primary beneficiary predeceases the retirement account owner, most documents provide that the contingent beneficiary will move up to the status of primary beneficiary. Also, if there are multiple beneficiaries and one predeceases the retirement account owner, the plan document may provide that that deceased beneficiary’s share is split pro-ratably among the other primary beneficiaries. However, the retirement account owner may prefer that the deceased beneficiary’s share go to his/her ( the deceased beneficiary’s) children. The key is to update the beneficiary designation so as to avoid these uncertainties.
Avoid Ambiguous Terms
When completing a beneficiary designation form, one should be as specific as possible. For instance the retirement account owner should not use a term such as ‘all my children’ if he/she has stepchildren or children from a previous marriage as this may lead to uncertainty as to which ‘children’ the designation applies. It may seem clear to the retirement account owner, but becomes a different issue with the custodian/trustee handling the designation, or even create a reason for the children to argue about which of them are the beneficiaries.
State law may prevail. For instance, State law may provide that stepchildren are not ‘ children’ for purposes of determining ‘who is your beneficiary’- but being clear helps to prevent disputes. Therefore, the retirement account owner should list all the children by name, or be as specific as possible.
Spousal Consent May be Required
If the retirement account owner is married and names someone other than, or in addition to his/her spouse, as primary beneficiary, he/she may be required to obtain the written consent of his/her spouse to do so. This is usually the case for qualified plans and ERISA 403(b) arrangements. For IRAs and Non-ERISA 403(b) accounts, spousal consent may be required in a community or marital property states. Some custodians require the consent, while others just strongly recommend that it is provided.
Obtain Written Confirmation of Receipt
Unfortunately, beneficiary designation forms do get lost in the mail or misplaced by financial institutions. In most cases, this is not realized until the beneficiary submitts a claim for the assets. To prevent this from occurring , retirement account owners should request a written confirmation-of-receipt from the custodian or plan administrator. The confirmation should identify the beneficiary designation form by account number and date, so that there is no confusion as to which version the confirmation applies.
A beneficiary designation form provides important estate planning for what may be one of an individual’s most valuable financial asset. One must be completed for each of an individual’s retirement accounts, and reviewed and updated at least once per year or whenever there are life changing events that affect the beneficiaries. If the beneficiary is a charity or other non-person, a verification process must be used to make sure it is still in existence and in good standing.
Custodians and plan administrators usually want to do the right thing, and presenting a beneficiary designation form in a manner that is consistent with their operational requirements, policies, and procedures will help them to do just that. Bear in mind that the individuals handling the designation forms are usually customer service associates with no legal background. Therefore, where possible, the designation should be as straightforward as possible. The more sophisticated designations should be submitted to the firm’s legal department for review and approval.