Tracking Down Beneficiaries
By Mary Hopkins, CISP, CIP
Recent guidance has revised payout options for inherited IRA assets. As soon as a financial organization receives a death certificate for an IRA owner, it should follow procedures and notify beneficiaries of their options. But many times financial organizations have a difficult time tracking down beneficiaries that are entitled to the assets. Some scenarios may have you questioning, what do we do with these assets now?
Beneficiary Predeceased IRA Owner
What happens to an IRA when a beneficiary dies before the IRA owner? The first step is to request a certified copy of the beneficiary’s death certificate. Once you have verified the beneficiary’s death, you should determine whether a per capita designation or a per stirpes designation was used.
A per capita designation generally passes IRA assets to any remaining surviving primary beneficiaries. If there are no other primary beneficiaries, then the assets will go to any contingent beneficiaries.
A per stirpes designation generally allows assets to flow through a deceased beneficiary to that beneficiary’s descendants, but can have different meanings based on how the IRA document or state law defines it.
Once you determine who should receive the deceased beneficiary’s share of the IRA assets, you can notify the proper parties of their options.
No Beneficiaries Named
What happens when an IRA owner never completes a beneficiary designation, or if all beneficiaries have predeceased the IRA owner? The plan agreement addresses a default beneficiary (typically the IRA owner’s estate) for this scenario. When an individual dies, a probate court will appoint an executor of the estate, or a small estate affidavit may be presented in some cases. These documents should be reviewed by the financial organization’s legal department before any IRA assets are distributed. Some states have community property laws that will award the spouse a portion or all of the IRA assets unless the spouse signed a waiver of those rights on the beneficiary designation form.
Beneficiary Disclaims Assets
Some beneficiaries may decide that they do not want to receive inherited IRA assets and will choose to disclaim their portion of an IRA. To disclaim IRA assets, the beneficiary must provide a written disclaimer to your financial organization within nine months of the IRA owner’s death or within nine months of the date on which the beneficiary turns 21. The beneficiary may not receive any of the disclaimed assets or decide where the assets should be directed. The beneficiary is essentially giving up her rights to the IRA and is treated as if she was never named as beneficiary. Once your financial organization verifies that the disclaimer is valid, you should follow procedures similar to those used when a beneficiary dies before the IRA owner: the IRA assets should be split between the remaining primary beneficiaries, or if there are no other primary beneficiaries, the assets should go to the contingent beneficiaries or to the default beneficiary listed in the IRA plan agreement.
Beneficiary Never Found
Sometimes financial organizations cannot locate beneficiaries after the IRA owner’s death. After exhausting all available resources to track down a beneficiary, you may be faced with the task of following state escheatment laws for abandoned IRAs. IRAs are typically considered abandoned after a period set by each state ranging from three to seven years of no activity once distributions are required. State law will dictate the specific steps that should be taken to start and complete the escheatment process.
If your financial organization becomes aware of a beneficiary’s death during this time, look to the plan agreement to determine the default successor beneficiary (typically the beneficiary’s estate).
