Keeping Your Beneficiary Form Safe

The beneficiary form is the single most important document there is when it comes to your retirement accounts. It determines who will receive your retirement funds, and in a way—thanks to a designated beneficiary’s ability to stretch inherited IRA distributions out over their life expectancy—how much the account will be worth to them. But despite the beneficiary form’s importance, many people don’t know about it. And those that do often take little to no precaution to ensure the forms are properly preserved in the event of a fire, flood or other disaster.

In the last several weeks, the East Coast has been rocked by a hurricane and rolled by an earthquake. Thankfully, the damage from both of these events was not as bad as it could have been, but they should still serve as a reminder that it’s never too soon to take action to secure the documents and valuables most important to you and your family.

Below is a quick 4-step action plan to ensure your beneficiary form is as safe as possible in any circumstance.

1. Check to make sure your current beneficiary designations are up-to-date and reflect your current wishes. If they do not, be sure to contact your financial institution and/or advisor to make sure they are properly updated as soon as possible.

2. Make sure there are no less than three copies of the most up-to-date form(s). The account’s custodian should have a copy, your financial advisor should have a copy and you should also have one on file.

3. Make sure you put your beneficiary form(s) in a safe place in the event of an emergency. For example, many people have small, fireproof safes in their home to protect their valuable documents and other possessions. Why not add your beneficiary form(s) to the safe? If you don’t have a safe, another great location is your safety deposit box at your local bank.

4. Be sure to let beneficiaries, executors and trustees know where they can find copies of your beneficiary forms. You may also want to provide them with the names of your financial advisor(s) and financial institution(s) so that if something does happen to you, they will know where/who to turn to for help.

TC Memo 2011-175

A business owner we will call “David” worked 35 hours per week for one company he owned, ran an Internet company and held partnerships in two other companies.

In 2003, he took distributions totaling over $500,000 from his qualified retirement accounts. In 2005, he received another $8,000 from the same accounts. In each case, a Form 1099-R (Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts) was issued to David. None of the Forms 1099-R indicated that the relevant distributions were nontaxable, and David did not pay tax on any of them.

In 2009, IRS imposed an additional 10% early distribution penalty under section 72(t) of the tax code. David claimed mental illness, arguing that he was exempt from the penalty under the disability exception.

The ensuing court case determined that David did not have the sufficient evidence of his mental illness outside his own testimony. IRS ruled he was not disabled and still owed the 10% penalty and all past taxes on those distributions.

LESSON TO LEARN:
This is one of those “believe it or not” situations where an individual was trying to avoid paying the 10% early distribution penalty with claims of disability. Section 72(t) of the tax code states that an individual will be considered disabled if he or she is unable to engage in any substantial gainful activity due to a medically determinable physical or mental impairment which can result in death or continue for an indefinite duration. David’s claimed mental illness did not satisfy that definition of disability.