multiple beneficaries for large IRA
A single client has a $1 million IRA. His 4 children are named as beneficaries, 25% each. Client is age 85 and in good health. Beneficaries range from single age 35 to married with his own grandchildren at age 65. Their financial position is also widely disparate.
Question – to allow the maximum flexibility for the beneficiaries in stretching out this IRA, do I have to split the IRA into four pieces with each beneficary named individually to one of the 4 new IRA accounts, or can that be done post death?
Permalink Submitted by Alan Spross on Fri, 2007-09-28 01:21
Bill,
It can be done either before or after he passes. If done before he passes, each beneficiary does not have the risk of missing the separate account deadline of 12/31 following year of death. Obviously, if he splits the IRAs now, he must set them up with identical investment allocations and make every change to each one of them from then one. That’s the disadvantage. He also has 4 IRAs to periodically verify that the IRA custodian has the exactly correct beneficiary information on file. There have been some disturbing cases of custodians mishandling beneficiary designations doing fairly routine system changes of changes in clearing firms.
I guess the final decision would rest on the added work by splitting it now vrs the assessment of the risk that the separate accounts would get botched somehow. The age difference would make that error critical.
Permalink Submitted by A Goren on Fri, 2007-09-28 01:51
But what if the IRAs are at Vanguard? Notice that the following also applies to taxable accounts and even to Transfer On Death accounts, all at Vanguard.
Vanguard Requiring Same Beneficiary For All IRAs.
“Do it or we’ll do it for you”, company tells investors.
Read this:
————————————————————–
“August 22, 2007- Vanguard is requiring customers to have the same beneficiary noted on all their IRA accounts, and if not changed soon, the mutual fund giant will do it for them, according to Forbes.
Vanguard sent out letters to 170,000 customers who had different beneficiaries on their multiple IRA accounts, stating they have to have identical beneficiaries for IRAs holding money rolled over from employer pension plans, traditional IRAs, both pretax and aftertax, and Roth IRAs.
If a customer doesn’t contact Vanguard, then Vanguard will apply the newest beneficiary form to all IRAs. If two forms were submitted at the same time, Vanguard will treat the one it processed later as newer. This is crucial for clients as it’s the form, not a person’s will, that determines who gets the money from an IRA account.
When Forbes showed Vanguard’s letter to IRA experts, they were outraged. “This borders on unconscionable,” said Robert Keebler, a Green Bay, Wis. CPA.
“It’s crazy. I don’t see how they can change the beneficiaries on your accounts without your consent,” said Natalie Choate, a Boston lawyer.
However, Colin Kelton, the Vanguard official who signed the July letter, said customers are getting adequate advance notice and will receive a second letter next month alerting them that they need to make a beneficiary change.
There is no way customers can get around the new rule. Forbes made two customer service calls to Vanguard. “There’s no way to override the computer,” declared one rep. He added that Vanguard is “a low-cost provider” and permitting different beneficiaries would increase its cost.
The other rep insisted that competitors wouldn’t allow different beneficiaries on IRAs, either. However, Fidelity and Charles Schwab said they allow clients to name different heirs on different IRA accounts. American Funds, Citibank, E-Trade, Janus Capital Group, Merrill Lynch, MFS and Wachovia, do as well.
If a client wants to invest IRA funds for different beneficiaries differently based on their own assets or taste for risk, Vanguard will still not allow that, Kelton said. That could drag Vanguard into family disputes, and curbing litigation is one reason for the policy change, he said.
The real problem is that Vanguard has allowed an account owner to name one beneficiary for a mutual fund account and a different beneficiary for an IRA account. Later, the beneficiary of a not as profitable fund or fund that went down in value, might argue that the IRA was set up when his fund had 50% of the money and that account owner really meant to leave him 50% of the whole account.
Vanguard could end up getting sued anyway by beneficiaries who were accidentally bumped by clients who never contacted Vanguard after receiving the letter, Estate lawyer Choate speculates. “
Permalink Submitted by Alan Spross on Fri, 2007-09-28 02:11
Good point. I had forgotten about Vanguard’s rather surprising ruling, but thought that I heard they might make exceptions should customers appeal with sound reasoning. If Vangaurd’s concern over investment performance is as reported, then perhaps they would relent if all account were invested identically. Vanguard also resisted customized beneficiary designations a few years back, but in some cases relented on that as well. I wonder what their reaction will be if the separate accounts are explained by “my kids don’t talk to each other” 🙂 ……..
It seems to be that they are just deferring some of the problems that can result to post death. If certain beneficiaries request separate accounts at different times, is Vanguard going to resist that as well or are they willing to face the allocation of post death investment returns properly to each date of separate account creation?
In any event, a few transfers of good balance accounts to their bitter competitor Fidelity will probably result in a change of thinking. But you are correct that if you are with Vanguard you may have another hurdle in creating the separate account pre death.
Permalink Submitted by Bill E. Brown on Fri, 2007-09-28 14:30
Thankfully, this account is at TD Ameritrade and not Vanguard. I think I’ll work on the beneficiary designations a bit to allow the older and more well off beneficiary the ability to disclaim his interest if he wishes.
Thanks to you all for your input!