stack of will and ira papers

Where’s the Beneficiary Form…?

One of the biggest issues we hear about from our professional colleagues is inherited IRAs. When handling any IRA, the beneficiary form should be one of your top priorities.

Checking your client’s beneficiary forms can be one of the highest levels of service you give them. Not only will this deepen your relationship with the client, but also communicates that you are seeking out their best interest. This simple but crucial form can open the doorway to many discussions about your client’s loved ones and dreams.

Not keeping up-to-date with these forms can quickly turn into a costly legal battle and hurt your client’s family. Missing or incorrect beneficiaries are an irreversible mistake. Because it’s only discovered once the client has died, this problem is rarely fixed.

This is where legal, tax and financial advisors are brought into the picture. They must decide how to distribute the inheritance without clear instructions and many legal obstacles. This frustrating process quickly leads to very long and expensive family disputes. This mistake is so easy to avoid by simply checking the beneficiary forms before your client passes away.

As a financial professional, the last thing you want to do is have your client’s family waiting for their money or to find out they have been disinherited altogether because no one checked the proper forms. This is bad news for both of you—even if this wasn’t your fault.

The best times to review and update beneficiaries’ information are at annual meetings and around major events such as:

  • A birth
  • A death
  • A marriage
  • A divorce
  • A remarriage
  • A new grandchild
  • A change in the tax laws
  • Charitable inclinations
  • Any other changes that influenced your client to select certain beneficiaries in the first place.

Any of these situations (or others) could prompt your client to change their mind and wish to eliminate a listed beneficiary or add a new heir to their IRA. You should have the kind of relationship with your client to know when these life-changing events occur and proceed to follow-up on their intentions.

The area’s most prone to problems with the beneficiary forms are divorce and IRA trusts.



A great example is the U.S. Supreme Court Case of Kennedy Vs. Plan Administrator.

The court ruled that a $402,000 401(k) should be paid to the ex-wife because she was never removed as a beneficiary after their divorce—even though she had reneged her claims for those assets during the settlement. This eight-year court battle ended with the daughter losing the inheritance her father had intended to give her all because the beneficiary form was not updated after the divorce was settled.

IRA Trusts:

  1. Name contingent beneficiaries. Here’s what happens when you don’t:

    Your client’s children could potentially lose their inheritance to their step-family.

    A man and a woman, with children from previous marriages, joined their lives together. The father names his new wife as the primary beneficiary while neglecting to add his own children or a trust as a primary or, at least a contingent beneficiary. This scenario could go in one of two ways:

    Option A: The new wife dies first and he doesn’t change beneficiaries before he dies. Since the new wife was named the legal beneficiary for his IRA, his kid’s inheritance goes to his second wife’s estate.

    Option B: The man dies, leaving his IRA to his second wife. She then proceeds to write out his kids despite his original intentions.

    Again, this would have been easily avoided if the current forms had been kept up to date, the advisor understood the intentions of the client, and chose to make the proper recommendations.

  2. A will does NOT replace the IRA beneficiary form.

    A common example is when a client assumes their IRA beneficiary is covered in the will. They go ahead and name one child (who is helping out with the paperwork or caring for the aging parents) with the intent of having their IRA split evenly between their three children.

    He states his wishes for the split assets in his will, but after he dies, the IRA beneficiary form overrides and the entirety of the IRA goes to the named beneficiary.

    Knowing the true intent of her parents, the named beneficiary wanted to make sure the inheritance was split fairly among all three siblings. This process exhausted time, legal fees, tax advice, nerves, and disclaiming other assets to make things even out. This chaotic situation could have easily been avoided.

  3. Losing a Stretch IRA.

    IRA beneficiaries can easily extend Required Minimum Distributions (RMD’s) over their lifetimes with something called a “Stretch IRA”. However, a Stretch IRA is only valid if the heir was specifically named as an IRA beneficiary on a current form.

    If the heir receives the IRA through the estate, they forfeit the benefit of the Stretch IRA since the estate is not a designated beneficiary.  Thus, the heir is likely to end up paying higher taxes on the inheritance.

As you consider a new approach to helping your clients, remember that simply writing down a name and social security number is not all that an IRA beneficiary form includes. Consider the recommendation of a fiduciary financial advisor within your network to make sure all of these issues are covered:

  • Keeping documentation that is current and accessible in the event of the loss of the account holder.
  • Tracking primary and/or contingent beneficiaries (“beneficiaries of beneficiaries”) is also vital to client due diligence.
  • Specifically designate the name of the beneficiary as an individual or qualifying trust. Make sure the estate is NOT named as a beneficiary.
  • Make sure the most current IRA or retirement plan beneficiary form is on file and is up to date with current information.
  • Finally, ask the client to update beneficiaries for investments (example: 401k, pension assets) not directly held with the advisor. Truly fiduciary advisors care about the client’s whole being, not just where they have a direct business relationship.

Don’t make this mistake. Show your client’s that you have their back.


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