INHERITANCE OF IRA ACCOUNTS

If you have an IRA, you probably completed a beneficiary statement when you opened the account. Do you know who the named beneficiary is? How can you change your designation of the beneficiary if you choose to?

Your IRA may be structured by an agreement you signed with the investment entity that manages it: your bank, brokerage house, or investment group. There also may be a separate document, commonly referred to as a "plan." These documents probably provide that the only way you can change your beneficiary is to do so by use of the investment entity's forms.

In a recent case between a surviving sister and her brother's remaining heirs, the Pennsylvania Superior Court found that the brother made effective, although not perfect, use of the proper form. Initially, upon opening the account, the brother had designated his sister as the beneficiary of his IRA account. Later, in making changes to his will and in creating a trust for his nieces and nephews, the brother directed his attorney to use the IRA to fund the trust and to make a separate cash bequest to his sister in the new will.

The brother, who was terminally ill, promptly signed the new will and also signed insurance forms changing the beneficiary designations on a savings account and a life insurance policy. He did not sign the IRA beneficiary designation form at the same time that he executed all of the other documents because his broker was on vacation and had not sent the necessary form. He repeatedly tried to obtain the form to sign it, but he passed away before the form arrived and it was never completed.

The sister later objected to the transfer of the IRA money to the trust on the grounds that the beneficiary form was legally controlling and that it had never been changed. The Pennsylvania court found otherwise. While acknowledging that insurance policies and investment agreements normally control the designation of beneficiaries, the court ruled that the intent of an account owner or policyholder can be given effect if he or she does all that is reasonably possible to comply with the requirements for changing beneficiaries. The detailed discussions the brother had with his attorney, his clear intent to fund the education trust, his execution of a new will, and his numerous and persistent requests to his brokers to secure the form all proved to the court's satisfaction that he had intended to change the beneficiary designation on his IRA.

Generally, courts are strict in enforcing existing beneficiary designations on investment accounts and insurance policies. Rarely will courts respect a beneficiary designation that is not made on the required form. Wise investors periodically review the status of their primary and secondary beneficiary designations. The effect of any delays in securing forms can possibly be offset by immediately and carefully memorializing in writing and communicating to your attorney your specific intentions to change your beneficiary.

The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.

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