Inheriting IRAs: The Importance of Beneficiary Forms

For many people, an Individual Retirement Account (IRA) is one of their largest assets. It is important to note that the beneficiary form on file with the custodian of an IRA, not a will, controls who inherits it. Therefore, it is crucial to file the beneficiary form and keep the designated beneficiary current. Often an IRA owner overlooks this detail after a divorce or after the designated a beneficiary dies.

If there is no beneficiary form on file, heirs are at the mercy of the IRA custodian’s default policy. Companies are not uniform in their policies. For example, Vanguard Group and Ameriprise award an IRA to a living spouse and then to the estate. Merrill Lynch sends it first to the estate. Only a minority of custodians pass on an IRA directly to the children of the deceased individual without a beneficiary form. These default policies may have disastrous or unintended consequences for an estate plan, especially when the testator mistakenly anticipated the account to go elsewhere.

A beneficiary form that only refers to the will can cause unnecessary complications, and even creates the risk of an IRA custodian not accepting the designation. For estate planning purposes, making the beneficiary designation a self-contained document may be a good method of clarifying your intentions and keeping the process as simple as possible for both the custodian of the IRA and the beneficiaries. Ideally, all beneficiaries are required to do is send the death certificate to the IRA custodian.

Information provided is of a general nature and does not act as a substitute for a personal discussion with an estate planning attorney. Your circumstances may create different legal opportunities.