Don’t Chance It with IRA Beneficiary Designations
When clients open an IRA, they’re usually thinking about how much they’re going to save for retirement—not who will receive their money when they die. But designating a beneficiary for their IRA is definitely something they should think about—however unpleasant. And while a financial organization is not required to have IRA owners designate a beneficiary, not doing so could lead to problems for the organization later, not to mention financial liability.
Overcome the Initial Challenges
Getting IRA owners to designate a beneficiary can be challenging. They might not understand the importance. Financial organizations should take the time to explain what happens if an IRA owner fails to do so. Organizations should also disclose the default beneficiary for the IRA (i.e., usually the IRA owner’s spouse or estate). Knowing the default beneficiary may affect how an IRA owner completes a beneficiary designation form, especially if the default beneficiary is not the same individual or entity that the IRA owner would have designated on her own.
The beneficiary designation form itself can have its own challenges. The form’s format (i.e., paper or electronic) may affect the quality of information received. An IRA owner is more likely to properly complete a form that is straightforward and has clear instructions. Because paper beneficiary designation forms run the potential risk of being misplaced or destroyed, many organizations are moving to electronic or online designations. This may solve the problem of misplaced forms, but can also present retention challenges if systems are upgraded or changed. On the other hand, electronic forms generally result in fewer errors. For example, using electronic forms can help ensure the correct percentage is allocated to each beneficiary.
Create a Review Process
The chances of a dispute increase when an IRA owner does not complete a beneficiary designation form. To avoid this, a proper form review process should be in place at the time the financial organization receives the beneficiary designation. This will help ensure that the form is complete and in good order.
Every designation form should specify the beneficiary’s name, address, birth date, and Social Security number, and clearly indicate the percentage of IRA assets that should go to each beneficiary. The following questions should be answered during the review process.
- Does the beneficiary designation clearly identify the beneficiary and is it understandable?
- Do all primary and contingent beneficiary designations add up to 100 percent at each level?
- Is it clear who the primary and contingent beneficiaries are?
- If the designation is unclear, does the organization have authority to reject it? Does exercising that authority put the organization in a fiduciary role?
If the beneficiary designation form is not clear or is missing information, the organization should have procedures in place as to how to obtain or clarify the information.
Keep Designations Up to Date
Making sure beneficiary designation forms are up-to-date can prevent future headaches for financial organizations. Because of the form’s potentially long shelf life, circumstances may change between the time the IRA owner originally completed the form and when he passes away. In addition, the longer designation forms are retained without being reviewed, the greater the risk of a form being lost or misplaced—especially if the financial organization is involved in a merger or acquisition.
Many financial organizations send out beneficiary update reminders on a regular basis—perhaps annually or once every five years. The value of this practice is clear: it reminds account owners to check that their designations truly represent their current wishes. In addition, it gives financial organizations some assurance that account information is up-to-date.
Be Aware of Adverse Consequences
Financial organizations are responsible for maintaining the IRA assets for the IRA owner, and once the IRA owner dies, for the IRA owner’s beneficiaries. Not having a valid beneficiary designation on file can be problematic in many ways.
The lack of an IRA beneficiary designation may cause hours of extra work for financial organizations. It may take several days or even weeks to determine whether a beneficiary designation exists but is missing, or whether the IRA owner simply failed to name a beneficiary.
Organizations that mistakenly disburse IRA assets to the wrong person or entity may be held liable for paying the correct amount to the right beneficiary. This may happen if the individual who incorrectly received the assets refuses to give the money back and the rightful beneficiary demands what he or she is legally entitled to.
Unfortunately, what seems like a simple beneficiary issue can quickly escalate into a full-blown lawsuit. Having a legally valid beneficiary designation on file can protect financial organizations from years of litigation and costly legal fees.
Prevent Future Issues
Naming a beneficiary is often as simple as filling out a few lines on the account application page. Financial organizations that take time to talk about beneficiary designations when an IRA is opened—and keep them up to date throughout the life of the IRA—may save themselves hours of work—and thousands of dollars—down the road.