The Importance of Keeping Beneficiary Designations Up to Date
By Kristiana Rodriguez
A Pennsylvania court case recently made headlines when a former girlfriend inherited over $1 million 25 years after the couple broke up. The retirement plan participant named his then girlfriend as the beneficiary on his 401(k) plan. Because the beneficiary election was never updated, the former girlfriend has been named the valid beneficiary of the account.
This case is a good reminder to financial organizations to brush up on their beneficiary policies and procedures, including the degree to which you do—or do not—monitor beneficiary elections, and communicate their importance to clients.
What is Your Financial Organization’s Responsibility?
Designating beneficiaries is not an IRS requirement, but it is important for your financial organization and IRA owners. An IRA owner may choose to name individuals or entities that will have rights to any remaining IRA assets when the IRA owner dies.
Financial organizations are responsible for paying out IRA assets to beneficiaries after an IRA owner’s death and properly report these distributions to the IRS. Ensuring that an IRA owner’s beneficiary designation is up-to-date and as complete as possible can minimize any distribution issues.
To ensure validity of their beneficiary designation, IRA owners should take the following steps.
Sign and date the document
Specify each beneficiary’s name, address, birth date, and Social Security Number (SSN)
Clearly indicate the percentage of IRA assets allocated to each beneficiary
Determine if spousal consent rules for beneficiary designation apply
Update beneficiary information as needed
A beneficiary designation is valid even without a birth date or Social Security number, but having complete information on the beneficiary is in the financial organization’s best interest to avoid problems later.
Updating and Revoking a Beneficiary Designation
Significant life changes, such as marriage, divorce, or the death of a beneficiary, can affect beneficiary designations, and may cause an IRA owner to revoke or modify a previous beneficiary designation. Every three to five years, IRA administrators may wish to have IRA owners review their current beneficiary designations. Often, IRA departments will mail a change of beneficiary form to all IRA owners with a request that the IRA owner review current designations and make changes as necessary.
The new designation(s) should be made on a form designed to replace an existing beneficiary designation, if desired. The new beneficiary form should be signed and dated by the IRA owner. The date is important to demonstrate that this beneficiary designation was made later in time than any previous designation.
Distributing assets to IRA beneficiaries
By taking proactive steps, your financial organization can ensure a smooth distribution process for IRA beneficiaries. Keeping an IRA owner’s beneficiary information complete and up to date is the best way to avoid the potential headaches associated with beneficiary distributions. By retaining proper beneficiary information while IRA owners are alive, financial organizations can greatly minimize distribution problems that can be encountered after an IRA owner’s death.
Before processing distributions to IRA beneficiaries, it’s important to review the IRA owner’s records to determine who is named as beneficiary and to look for the most current documentation. Financial organizations must also properly report distributions under the beneficiary’s name and SSN. If there is no named beneficiary, consult your plan documents and state law to identify the default beneficiary.
Ascensus offers courses on IRA Beneficiary Distributions, if you would like further training on this topic.
Best Practices for Financial Organizations
Have IRA owners designate beneficiaries when they establish an IRA
Obtain any missing or clarifying beneficiary information
Ensure any percentage designations add up to 100 percent
Inform IRA owners of their responsibility to know if spousal consent rules apply
Provide opportunities for IRA owners to review or update their beneficiary elections
