A retirement account owner may update a beneficiary designation at any time the individual wants to change or update the existing designation. However, included below are some instances when the change is a requirement, as opposed to an option:
- The individual divorces or remarries. If an individual fails to remove a former spouse as the beneficiary of the retirement account, this could cause discord when the individual dies, as the former spouse may believe that he or she should receive the assets, because he or she is the beneficiary of record. The new spouse and/or surviving children may feel differently. In instances such as this, it may be necessary to have the matter resolved by a court.
NOTE: If you are aware that there is a dispute about a designated beneficiary, you should notify your home office immediately. Accounts involved in a dispute are usually frozen until the dispute is resolved.
- The beneficiary predeceases the retirement account owner. Generally, if a primary beneficiary predeceases the retirement account owner, the deceased beneficiary’s share will be allocated on a pro-rata basis to the surviving primary beneficiaries. If there are no surviving primary beneficiaries, then the contingent beneficiaries will be treated as primary beneficiaries. There may be exceptions to this rule, for instance, if the participant used a customized beneficiary designation (see below). If there are no other primary or no contingent beneficiaries, then the beneficiary designation will be determined by the default provision of the plan document.
- No beneficiary was designated when the account was established. If the retirement account owner fails to designate a beneficiary, then the default provisions of the plan document may determine the beneficiary. An example is Pershing’s IRA plan document, which provides that if the IRA owner does not designate a Beneficiary, the beneficiary predeceases the IRA owner, or the beneficiary cannot be located when the IRA owner dies, the IRA balance will be paid in the following order of priority:
I. The deceased beneficiary’s surviving spouse, if any
II. The deceased beneficiary’s children, if any, in equal shares per stirpes
III. The deceased beneficiary’s estate
Specifying Percentages. The Pershing IRA plan document, provides that if the IRA owner designates more than one primary beneficiary, but does not specify the percentages to which each beneficiary is entitled, each primary beneficiary will then be entitled to equal percentages. Therefore, if the IRA owner wants to allocate a larger percentage to one beneficiary, he or she must indicate the applicable percentages on the beneficiary designation form.
Community or Marital Property State. The laws of some states provide that any property acquired during a certain period is community or marital property. These are referred to as community or marital property states. If the IRA owner resides in a community or marital property state, and designates someone other than his or her spouse as the primary beneficiary of the IRA, the spouse may be required to provide written consent to the designation. In some states, the consent must be witnessed by a notary public. If the proper consent is not obtained, the beneficiary designation may be invalid. The community and marital property states are Alaska (only if the couple choose to have the laws apply), Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Participants should be encouraged to seek legal advice to determine If their retirement account is subject to community or marital property laws.
Employee Retirement Income Security Act of 1974 (ERISA) Accounts. ERISA accounts are qualified plans and 403(b) accounts that receive employer contributions. The spouse is the designated primary beneficiary of these accounts, unless the spouse provides the proper waiver to allow someone else to be a primary beneficiary of the account. If participant designates someone other than the spouse as the primary beneficiary and proper consent was not obtained, the beneficiary designation may be invalid and the spouse will be treated as the sole primary beneficiary. For ERISA accounts, spousal consent must be notarized or witnessed by a representative of the qualified plan.
Customized Beneficiary Designations
Many retirement accounts are using customized beneficiary designations, instead of the traditional beneficiary forms. A customized beneficiary allows the retirement account owner to implement contingencies. For instance, the designation could provide that if the primary beneficiary predeceases the retirement account owner, the designated beneficiary will then be the children of the (deceased) primary beneficiary. In most cases, this negates the necessity of updating beneficiary designations should the original primary beneficiary predecease the retirement account owner.
You should encourage each of your participants to seek competent legal advice about customized beneficiary designation, to ensure they comply with the requirements of state and federal law.
It may be a good idea to make sure that your clients’ beneficiary designations are updated, especially if they experienced relationship changes since their requirement account was established. These changes include death of a designated beneficiary, divorce, and remarriage. These updates will help to ensure that the beneficiaries are easily identifiable and reduce the chance of disputes. Death transfers and distributions could then be processed timely, thereby avoiding penalties that could arise from delays.
The information contained in these materials is believed accurate at the time of writing but is not guaranteed. Delta accepts no responsibility for its use whether in whole or part.