3 Complex Issues with Naming IRA Beneficiaries

By Christle Johnson, QKA, CIP

IRA owners may name any person or entity as the beneficiary to receive IRA assets upon their death. They may name relatives, friends, or any other individual. They also may name a church, charitable organization, a family trust, a business, their estate, or any other entity as the IRA beneficiary.

The decision to select a beneficiary appears simple, but three complex issues may surface:

Community property laws
Authority of an agent to name the beneficiaries for an IRA owner
A beneficiary designation that intends to pass benefits to a primary beneficiary’s descendants if the beneficiary dies before the IRA owner

Community Property Laws

State community or marital property laws may give a surviving spouse rights to the IRA assets even if she is not named as a beneficiary. The spouse may waive community or marital property rights, which often can be done on the IRA application.

Ten states have community or marital property laws that control the payment of IRA assets after the IRA owner’s death:

Although the spouse’s right to a share of the IRA assets may arise at the time the contributions are made, no payment usually is made until divorce or the IRA owner’s death. If IRA assets have not been transferred to the former spouse incident to divorce, the former spouse may still have a claim on the assets when the IRA owner dies. For these reasons, financial organizations should consult with legal counsel before distributing any assets in such circumstances. Be aware that while a former spouse may have some right of IRA ownership, he generally would not be entitled to a spouse beneficiary distribution—or treat-as-own—options, if not a spouse at the time of death.

Any of the following facts may allow your organization to process a beneficiary payment without considering community or marital property laws.

The IRA owner was not married at any time.
The surviving spouse signed the spousal consent section of the beneficiary form (or application) that determines the beneficiaries.
The IRA owner did not live in a community or marital property state during the time he was married to the surviving spouse.

Authority of an Agent to Designate Beneficiaries

The authority of a conservator, guardian, or power of attorney (POA)—herein referred to as “agent”—to designate who receives death distributions from an IRA is a matter of the governing document’s scope. For example, if the POA document states that changes to IRA beneficiary designations may be made, then the allowable action is clear.

Power of Attorney: A written instrument signed by one person (the “principal”) that grants another person (sometimes called the “attorney-in-fact”) the authority to act as an agent on the principal’s behalf.

In cases where the governing documentation is not clear, or is silent, financial organizations should consult their state law and involve legal counsel to set a policy as to what they will allow. Agents should also consult with their legal counsel for guidance on the powers they have regarding IRA management.

If the IRA owner did not designate beneficiaries, the IRA plan agreement generally will dictate who should receive the IRA assets after death. Before allowing an agent to change a beneficiary designation, your organization must verify that the agent has the authority to do so. Your organization also may choose to retain the previous beneficiary designation completed by the IRA owner, in case issues arise after the IRA owner’s death.

Financial organizations should check with legal counsel if they allow an agent to name an IRA beneficiary or change an existing IRA beneficiary to ensure that the agent has the authority to do this. Financial organizations that allow an agent who lacks authority to name an IRA beneficiary or change an existing IRA beneficiary could be liable if the IRA assets are distributed after death based upon an invalid beneficiary designation.
Financial organizations should always consult with legal counsel for any other questions.

Per Capita vs. Per Stirpes Beneficiary Designations

Some IRA owners are adopting more sophisticated estate planning strategies. Financial organizations are sometimes asked if they will accept a different, often more complicated, type of beneficiary designation, usually drafted by an estate planner or attorney. One such form of designation is a per stirpes beneficiary designation.

Per Capita Example

Carol names her two children, Peter and Cindy, as equal primary beneficiaries on her IRA. Carol’s IRA document is drafted with a per capita beneficiary designation. If Peter dies before Carol, his share (50%) of the IRA assets will pass to Cindy upon Carol’s death. Cindy will receive 100% of the IRA assets, leaving Peter’s family with no share of the IRA.

Per Stirpes Example

Carol’s attorney drafts a typical per stirpes beneficiary designation that names her two children, Peter and Cindy, as equal primary beneficiaries of her IRA. If Peter dies before Carol, his share (50%) of the IRA assets will pass to his heirs upon Carol’s death, rather than 100% passing to Cindy. Thus, Carol ensures that each child’s family will benefit equally.

Financial organizations are not required to accept every possible beneficiary designation presented by an IRA owner, including per stirpes beneficiary designations. Your organization should consult with its forms provider or legal counsel to confirm the beneficiary assumptions under the IRA documents your organization uses, and whether alternative designations can be accommodated under the existing document.

If you are willing to accept beneficiary designations not typically used by your financial organization, procedures should be established to ensure that the designations received contain proper information so that your organization will understand who the beneficiaries are and how to pay out assets after death.