Problems with IRA custodians/trustees with beneficiary designations

[Bruce Steiner]

A client wants what I consider to be a fairly typical IRA beneficiary designation. He wants his wife as the primary beneficiary. If his wife does not survive him, he wants his benefits to go to his issue, not outright, but rather each person's share is to go to the trust for that person under the client's Will.

This seems like it's what most people would want, especially in our practice where most people provide for their beneficiaries in trust rather than outright, except for retirement benefits going to the spouse (which generally pass outright so the spouse can roll them over).

We are having a problem with a major financial institution which doesn't seem to understand this.

I suppose we could have drafted the Will slightly differently, to provide for a residuary trust which, if the spouse does not survive, is divided into equal shares for the children and held in further trust for their benefit, so that the residuary trust's existence is momentary, and then named the residuary trust as the contingent beneficiary. But, notwithstanding PLRs 9012009 and 9004042, the way we drafted it might give each child a slightly better chance of being able to use his/her own life expectancy.

The broader issue here is that it seems that I or fellow practioners have had difficulty (thus resulting in increased costs to the client) with a good many financial institutions.

Does anyone have any thoughts on this?

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Bruce Steiner, attorney

(212) 986-6000 (NY office)

(201) 862-1080 (NJ office)

also admitted in FL

[John Olsen]

Bruce,

Alas, many financial institutions (not only ones named for part of a field army) are downright mulish when it comes to accepting designations which differ from their own templates.

Cy Goldberg tells of Trust Company and Mutual Fund home offices which neither know, nor apparently wish to know, what the law permits, with regard to distribution options.

I had a service person from a fund company object to my beneficiary designation submitted for a client's account with that firm (we didn't want to use their stock form, as it was silent on almost EVERY point, INCLUDING RECALCULATION), saying "we don't get into stuff like 'per stirpes'".

The word I hear is that things are getting better, because the Fund Companies, Banks, and Trust Companies are learning that, if they don't want to accomodate reasonable requests, SOMEBODY ELSE WILL BE HAPPY TO. Alas, this hasn't penetrated to all quarters of the industry, yet.

Goldberg has some good suggestions on this issue in his "Pension Distributions, Planning Strategies: Cases and Rulings" (1998, Seymour Goldberg - a link to ordering is on this Roth IRA Web Site).

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John L. Olsen, CLU, ChFC

Olsen Financial Group

St. Louis, MO

[BPickerCPA]

Alas, if you follow Sy Goldberg or Natalie Choate, then a beneficiary designation will be almost like a will. This is a not a bad thing. After all, it IS a substitute for a will as far as disposing of the retirement assets.

Best I can suggest is to find (maybe we can list them here) the trustees that will accept such a beneficiary designation form. Then you can go to the others and state that they either take (and acknowledge receipt of) the beneficiary designation, or the account gets moved.

The good old, "vote with your feet" method!

[Bruce Steiner]

It's like a Will in the narrow sense that it sets forth the recipients and the method of determining each recipient's share, though the terms of the trusts are generally contained in the Will rather than the beneficiary designation (though I know of one practioner whose beneficiary designation form runs about 30 pages and contains all the trust terms).

I didn't want to mention the name of the financial institution here, and in any event we've had trouble with many of them.

On the other hand, we've had good experiences with some of them. In some cases, for example, we've used a complicated formula dividing the benefits between the spouse and the credit shelter trust using a marital deduction formula.

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Bruce Steiner, attorney

(212) 986-6000 (NY office)

(201) 862-1080 (NJ office)

also admitted in FL

[Guest LMH]

In defense of BDs and Fund companies, many don't allow alternatives to their own documents and designations due to the fact they have hundreds of thousands IRA accounts.

Now granted the person answering your call doesn't understand why their rules are they way they are, and I am sure this is frustrating. But imagine if you will a BD with 200,000+ accounts, of which a handful have per stirpes designation. It is hard enough to deal with the first generation of beneficiaries, let alone dealing with death certificates and letters of testamentary from the second generation.

I agree that there are firms out there that are more than happy to handle these "special" designations, but take a moment to see that the BDs and Fund companies aren't simply trying to be contrary, but provide a service the masses for a minimal annual fee.

[Guest P A Weick]

The times when I have had problems like this arise is when the IRA is a deposit product at the bank. If the IRA is with the bank's Trust Department non uniform beneficiary designations are not a problem as they are set up to provide that type of individualized service. However, trying to work anything but a standard designation on a deposit IRA is often like going to Walmart to order a tailored shirt.

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[Bruce Steiner]

"Per stirpes" is just a way of saying in two words what would otherwise take about two pages.

Many people use the trust department of a bank *after* they die. But while they are alive, they often manage their own money. Very few clients have their IRAs as bank deposits.

The problems seem to arise primarily with mutual fund companies, where there is no individual who will suffer if the client moves the account to another institution. Problems sometimes arise, too, with the retail side of banks where the IRA is held in the form of bank deposits.

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Bruce Steiner, attorney

(212) 986-6000 (NY office)

(201) 862-1080 (NJ office)

also admitted in FL