Pub. 8 2020 Issue 4

17 The Community Banker obtain beneficiary information in cases where a beneficiary form is not on file. Outdated Beneficiary Designations IRA owners often name a beneficiary when they open the account and then they forget about it. In the interim, they may get married, have children, get divorced, remarry, and never take the time to update their IRA beneficiary information. The omission is often not discovered until the IRA owner dies, with consequences that can be emotionally devastating to the family. In many cases of remarriage, the IRA owner’s former spouse remains the beneficiary of the IRA. While more than half the states revoke a former spouse’s right to inherit, other states do not, so the IRA assets often end up being paid to a former spouse, which is likely not what the IRA owner intended. In other cases, when the original beneficiary was a parent or sibling who is now deceased, payment is then made to the IRA owner’s (or beneficiary’s) estate absent the naming of a contingent beneficiary. This often forces the family to incur the expense of probating the estate for the sole purpose of collecting the IRA assets. As a best practice, you should periodically remind your IRA owners to review and update their IRA beneficiary information. Some IRA trustees and custodians ask IRA owners to review their beneficiary information whenever they make other changes to their accounts or as part of an amendment mailing. Incomplete or Incorrectly Completed Beneficiary Designations Paying IRA assets to an incorrect beneficiary can be costly for an IRA trustee or custodian — both in terms of financial liability and reputational risk — so it is crucial to obtain complete information for each beneficiary; not only to identify the beneficiary at the time of death but to assist in locating them. It is also critical that the benefi- ciary form is properly completed. Make certain that the percentages for each level of beneficiary — unless they are to be divided pro rata — add up to 100%, that the form is signed by the IRA owner (and a witness if required by your organization), and a consent of spouse is obtained if needed when naming a non-spouse beneficiary. Obtain complete information for each beneficiary, including full legal name, address and date of birth. Many IRA trustees and cus- todians also require the beneficiary’s Social Security number. Avoid vague or ambiguous designations such as “all my children” or “trust.” All My Children was an American television soap opera, but it is not appropriate for an IRA beneficiary form. Instead, the IRA owner should list the full legal name of each child. Likewise, if naming a trust, make sure the trust’s complete name is listed on the form— for example, Joe Smith Revocable Living Trust, dated July 20, 2014. Finally, if the IRA owner makes a mistake when completing a beneficiary designation form, discard the form and start over, or at a minimum, have the IRA owner sign and date any hand-written changes. You should review beneficiary designation forms for completeness and accuracy before accepting them. If an error is later discovered, the IRA owner should be contacted and asked to complete a new beneficiary form. In cases where an IRA owner chooses not to name a beneficiary, ask her to check the box on the beneficiary designation form to indicate that she has elected not to name a beneficiary at the time. You may also want to remind her that the IRA’s terms — not her will — generally govern the distribution of assets from her IRA and encourage her to complete a beneficiary form. Incorporate Best Practices Incorporating best practices for obtaining and retaining IRA bene- ficiary designations will ensure that IRA assets are paid following the IRA owner’s wishes and reduce the chances of paying out IRA assets to an incorrect beneficiary, along with the legal, financial and reputa- tional risks of doing so.