IRA Beneficiary Instructions
We recently had a client insist that we accept some rather complicated beneficiary instructions involving several layers of potential beneficiaries based on different scenarios and what their distribution options were to be for the final beneficiaries upon her passing.
When the office brought this situation to my attention I informed them that we could not accomodate this cumbersome request and that if the client wished to control exactly how her assets were handled from beyond the grave then she should invest in establishing a trust which she could then name as her IRA beneficiary.
She of course rejected this suggestion and left her written instructions with the various scenarios and beneficiaries at the office in which the IRA was opened. When I reviewed the paperwork that the office completed for this account I noticed that she had actually named several primary and contingent beneficiaries, however they had no percentages listed.
I spoke to the the client to make sure she understood that according to the plan documents we use the primary beneficiaries listed on the IRA application would all be entitled to equal shares of the account and as they were all legally adults they would be able to make their own beneficiary distribution elections, also attempting to explain how a contingent beneficiary would come into play based on what was listed on our form. She was not happy with my clarification and was even less happy when I tried to suggest the establishment of a trust if she really wanted to dictate exactly how her funds were to be handled after her passing.
A few days later we received a letter via certified mail containing a copy of the same written instructions that she left with the account opening documentation. I am wondering if there is any possibility that we will be obligated to follow these written instructions since the office only verbally refused to accept the documents but kept them with the account opening documentation and now she has sent them to us again via certified mail.
Permalink Submitted by Jose Morales on Tue, 2008-12-09 17:16
I would love to but it is not my decision. I’m drafting a letter and running it by our legal department. She basically wants to make the beneficiary elections before she passes away and has different elections based on who would be the beneficiary at the time of her passing. She needs a trust set up for this, it just can’t be done with a simple letter of instruction.
Permalink Submitted by Alan Spross on Tue, 2008-12-09 19:32
Are there not any institutional guidelines outlining unacceptable beneficiary requests and/or providing authority to reject an account for various unacceptable characteristics?
I think we all agree that this account presents the prospect of major future problems including litigation. That said, I am somewhat surprised that the plan documents do not allow for % shares to primary beneficiaries, as that is fairly basic. However, it does illustrate an apparent desire to avoid any complex arrangements such presented by this client.
Permalink Submitted by Jose Morales on Tue, 2008-12-09 19:55
Both our IRA Application and our Designation/Change of Beneficiary forms do both have sections where the IRA owner should indicate the percentages for each primary and/or contingent beneficiary. In this case the client left that section blank. Our forms clearly state that in the event that no percentage is listed the default assumption is that the IRA owner wishes to have the funds divided equally amongst all the listed beneficiaries.
The reason why the client did not indicate a percentage is because she wants the percentages to be determined based on the different possible scenarios and beneficiaries at the time of her death.
Believe me, I would have turned the client away and explained that they may be better served at another financial institution, however our personal bankers don’t always listen to my advice. I don’t even believe that this person is legally able to determine a beneficiary’s distribution election for them before she passes if the beneficiary is an adult and directly named on the plan documents.
Permalink Submitted by Bruce Steiner on Tue, 2008-12-09 23:00
As long as there’s some objective way to determine which contingencies have occurred, there shouldn’t be any problem.
Permalink Submitted by Jose Morales on Wed, 2008-12-10 00:42
How would it be possible for us to tell a 30 year old named beneficiary to an IRA that his mother decided that he would not have the option of a lump sum distribution and he could only take lifetime distributions? Or tell another beneficiary that now that he/she has reached the age of 35 that they are no longer a beneficiary to the IRA but someone else is, as well as tell all the other beneficiaries that now that this new person is a beneficiary the percentages that they have a right to has changed as well? I don’t think that even if we wanted to do this for her that we could.
Permalink Submitted by Alan Spross on Wed, 2008-12-10 05:29
I do not know of any IRA custodian who would undertake such a project even if the IRA owner drafted a detailed and seemingly air tight beneficiary statement. Many custodians to not even like per stirpes or per capita designations. Vanguard, for example, does not like survival periods in beneficiary statements either.
She needs some combination of multiple IRAs with different beneficiaries on each, and to which she can make the changes when she wishes. If there is enough money in this account perhaps she will consider that after a few other custodians turn down her current request.
It seems obvious that within a few months of accepting such a complex statement that she now wants, she would want to change it again. Of course, a trust beneficiary could also work or separate trusts for each branch of this family.
She cannot effectively predict what these beneficiaries will be like when they reach a certain age, nor is she likely to maintain the same wishes even if they did………..