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The Importance of a Beneficiary Audit

M Caton 2014
Maria Caton, CFP®, ChSNC®, AAMS®
Vice President, Wealth Advisor
(585) 419-0670 x50666

As we approach the end of the year, many of our financial reviews with clients focus on portfolio performance and potential tax loss harvesting. Of equal importance to review is a beneficiary audit. A beneficiary audit is a “check-up” process for IRA’s and other retirement accounts. It ensures that the intended parties inherit your retirement accounts as your estate plan dictates.

Designation Forms

The first step is to identify that all retirement accounts have a completed designation form. Transferring an IRA from one custodian to another does not transfer the beneficiary designations. A new form needs to be completed as the new account is opened. When it comes to employer sponsored retirement accounts, the beneficiary form may not be a part of the account application, rather it may be included in a separate benefits package along with other forms. This can make it easy to negate selection of beneficiaries.

Life Events

Beneficiary designations should also be reviewed whenever there is a life-event, such as marriage, divorce, new family (births and adoptions), as well as death. It is quite possible to have named grandchildren as beneficiaries of an IRA and inadvertently omitted younger grandchildren born subsequent to the account opening and funding if updates were not done.

Flexible Options

An audit can also help beneficiaries avoid the limited distribution options that are usually required from non-designated beneficiaries, thus allowing flexible and tax-friendly distribution options. Non-designated beneficiaries include any beneficiaries for whom a life expectancy cannot be determined, such as non-qualified trusts, charities, and the decedent’s estate. Qualified accounts with non-designated beneficiaries must be distributed either within 5 years of the owner’s death if they die before attaining age 70½ or, if the owner had already attained age 70½ and was receiving required minimum distributions, these must continue until the account is depleted.

Naming Additional Beneficiaries

It is possible, and quite common, to have more than one beneficiary identified for a qualified account. IRS rules issued in 2002 have made planning for this situation much easier. Beneficiaries now have a “Gap Period” between the date of death of the account owner, and September 30th of the following year, called the “Designation Date”, in which to separate the account for each beneficiary. This provides beneficiaries more flexibility in their planning and the opportunity to take distributions as they wish.

It is also advisable to name a contingent beneficiary who steps into the role of primary beneficiary in the event the primary beneficiary predeceases the retirement account owner, or if the primary beneficiary disclaims the retirement account. If the primary beneficiary is deceased, and no contingents are named, the estate becomes the beneficiary and the account must be distributed within 5 years.

Estate Plan Coordination

Lastly, it is most important to coordinate beneficiary designations on all qualified accounts with those listed in their will or in their estate planning documents. Beneficiary designation forms control who legally is entitled to the account, not the will.

If you’d like to schedule an appointment to review your beneficiary designations or have any questions about your estate plan, please contact us today at 585-419-0670.

This material is provided for general information purposes only. Past performance is not indicative of future investment results. Any investment involves potential risk, including potential loss of capital. Before making any investment decision, please consult your legal, tax and financial advisors. Non-deposit investment products are not bank deposits and are not insured or guaranteed by Canandaigua National Bank & Trust or its affiliates, or any federal or state government or agency and are subject to investment risks, including possible loss of principal amount invested.