Where Does the IRA Go When Beneficiary Designations Fail?

Following up on my recent discussion here about beneficiary designations as a "Stealth Will", a new survey done by NICSA, a not-for-profit trade association, found little consistency in how financial institutions treat a default beneficiary designation on retirement accounts.

As my clients and seminar participants get tired of hearing from me, beneficiary designations are incredibly important, and are estate planning documents. But most people don't understand that they are actually, really, a contract between the financial (or other) institution, and the account holder, where the parties agree that the financial institution will hold an asset belonging to the individual, and at their death, pass it directly to the listed beneficiary.

But what if there is no listed beneficiary, or all the listed beneficiaries have predeceased.

The NICSA survey found that the default beneficiary differs greatly among financial institutions.

As noted in the NICSA press release on the survey:

The survey found little consensus among providers when it comes to policies for naming beneficiaries or for the documentation required after death. For example, there was no consensus on the appropriate default beneficiary when an IRA account holder fails to name a beneficiary. Only 30{93997c19cca2413204031df21c26e128a46aabe0f65d6d1b886d87d0d40a7681} of respondents name the estate as the default beneficiary, while 43{93997c19cca2413204031df21c26e128a46aabe0f65d6d1b886d87d0d40a7681} designate a surviving spouse and then the estate, and 22{93997c19cca2413204031df21c26e128a46aabe0f65d6d1b886d87d0d40a7681} distribute first to a surviving spouse and then to children -- and only after that to the estate.

So while many clients assume all beneficiary designated assets to their spouse (or to them if they are thinking of their spouse), 30{93997c19cca2413204031df21c26e128a46aabe0f65d6d1b886d87d0d40a7681} of the time that does not happen. Similarly, 63{93997c19cca2413204031df21c26e128a46aabe0f65d6d1b886d87d0d40a7681} of the time, the benefit would go to the estate before it goes to a child.

All the more reason to make sure to take care of your beneficiary designations now. If you are not sure if you named someone specifically, if you are not sure who you named, if you don't have a copy of the accepted designation, or if you don't know where that copy is - it is time to do a new beneficiary designation.

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Norman B. Handler, co-founder of the firm, and beloved friend and mentor, died on December 26, 2020. Norman’s greatest trait as an attorney was not his legal knowledge, his tax experience or his inexplicable love of forms and calculations – i… Read More

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