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December 14, 2010

Naming Your IRA or 401k Beneficiary In Your Will May Not Work

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By Denise Appleby, CISP, CRC, CRPS, CRSP, APA

If you named your Will as the beneficiary of your IRA, 401(k), 403(b) or other retirement account, including stating “As per my Will” or “Will” on your beneficiary designation form, you need to consider updating that form immediately and make sure that it makes specific reference to the identity of the individuals and/or entity that you want to be the beneficiary of that retirement account.

Most IRA custodians and plan administrators will not accept designations of “My Will” or “As per my Will”.  Do not assume that because you sent in the form and did not receive a response from the custodian or trustee, that they have “accepted’ your designation. Even if the beneficiary form was received and placed on file, it does not mean that it satisfies the custodian/administrator’s requirements. In many cases, these forms are merely placed on file by the individuals who open the mail, and are often not reviewed for completeness, accuracy, or to determine whether they are in general ‘good order’[1]. The issue would then become apparent only when your beneficiary comes forward to claim the assets, likely resulting in frustration for everyone involved.

Why?

Because assets in an IRA, qualified plan, 403(b) arrangement or governmental 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 or IRA agreement which governs your retirement account. As a result, it is unlikely that any specifications that you make in your Will as it relates to who is the beneficiary of your retirement account would be  honored by your IRA custodian or plan trustee. This means that your beneficiary would then be determined according to the most recent beneficiary designation form that your custodian/trustee has on file.

What If Your Beneficiary Challenges Custodian’s/Trustee’s Position?

If the person named in your Will as a beneficiary of your retirement account is different from the person named on your most recent beneficiary form on file with your IRA custodian or plan trustee, the beneficiary named under your Will may get the urge to challenge the beneficiary form on file. This may mean incurring legal expenses. Further, when beneficiary designations are challenged, IRA custodians/trustees often freeze the assets until the matter is resolved, which means no one would be able to make withdrawals during that period.  In some cases such matters have been escalated to the courts.

Referring The Matter to The Court May not Help

Unless the Will makes specific reference to the retirement account, and provides explicit instructions as to who is the beneficiary of these assets, a judge may find it difficult to have it apply to the retirement account. Even if it does include specific and explicit instructions, there is still no guarantee that the court would make a ruling to have it apply to the retirement account. Additionally, even if the court rules that the language in the Will is ‘acceptable’ for purpose of determining the beneficiary of the retirement account, the IRS may disagree with the judge’s ruling. [2]

Conclusion

To help prevent the complications for all concerned; it is very important that you correctly and accurately complete your beneficiary designation form.  In addition, you should also make sure that the paperwork is properly completed and updated whenever you make any changes to your beneficiary designations.

Help your beneficiaries to avoid the complication of trying to determine who (really) is the beneficiary of your retirement accounts, by completing the right paperwork when naming your beneficiaries. In addition, make sure the paperwork is properly completed and updated whenever you need to make changes.

This article was written by Denise Appleby of Appleby Retirement consulting Inc. Appleby Retirement Consulting Inc provides Technical Consultation, Coaching and Content to financial, tax and legal professionals on IRAs and certain employer plans.

 

[1] ‘Good order’ means documents that satisfies the IRA custodian’s or trustee’s operational and compliance requirements

[2] See Private letter ruling 200846028,, where the IRS ruled that t the beneficiaries of the IRA are not identifiable from the language on the form “as stated in wills.”, despite a court order that the phrase “as stated in wills” was sufficient to identify the beneficiates of the IRA.

 

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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