IRA Custodial Agreements vs. State Law
I have noticed many large institutions that maintain their own beneficiary “ordering rules” for cases where a client doesn’t name the estate as the original beneficiary. Instead many of these companies default to the surviving spouse and/or surviving children.
Does anyone know what the legal concept is here? I know that IRAs are trust agreements governed by 408(a), but does that law specifically grant the custodian the ability to supersede original owner’s will in a case where the original designated beneficiaries are no longer alive? Or is it dependent on state law governing trusts on a case by case basis? It seems to me that the custodians are simply extending the common legal treatment of most states by avoiding disinheritance of dependents by accident. Is this simply a risk-based decision by large corporations in an effort to avoid getting involved in too many family disputes?
we routinely get questions about this and neither the custodian, nor independent legal counsel seem to have a clue why this is allowed legally speaking. Is it because the “prudent man rule” is subjective and reasonable people can disagree what the best way is to disburse proceeds under state law governing trust administration?
sorry for the long post. 😄
Permalink Submitted by Alan - IRA critic on Fri, 2024-05-24 23:07
A plan is allowed to name their own default beneficiaries, and it usually is the spouse or possibly any children if the spouse pre deceased. Of course, for ERISA qualified plans the spouse must be named unless they sign a waiver. Therefore, fewer estates actually inherit these plans because of these default rules. You are correct that the default beneficiaries do result in fewer accounts becoming subject to probate and therefore less litigation. I have not heard of any IRA default beneficiary rules becoming the source of litigation despite the fact that the default beneficiary will be different than the will beneficiary in some of these. If there is no will, the state intestate rules would line up with the stated default beneficiaries in most cases.