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WHAT BENEFICIARIES NEED TO KNOW

What do you do when an account owner passes away?


If your loved ones have invested, saved or insured themselves to any degree, you may be named as a beneficiary to one or more of their accounts, policies or assets in the event of their deaths. While we all hope “that day” never comes, we do need to know what to do financially if and when it does.

Legally, just who is a “beneficiary”? IRAs, annuities, life insurance policies and qualified retirement plans such as 401(k)s and 403(b)s are set up so that the accounts, policies or assets are payable or transferrable on the death of the owner to a beneficiary, usually an individual named on a contractual document that is filled out when the account or policy is first created.

In addition to the primary beneficiary, the account or policy owner is asked to name a contingent (secondary) beneficiary. The contingent beneficiary will receive the asset if the primary beneficiary is deceased.

Some retirement accounts and policies may have multiple beneficiaries. Charities, schools and nonprofits are also occasionally named as beneficiaries. If you have individually listed one (or more) of your kids or grandkids as designated beneficiaries of your 401(k) or IRA, that designation should override a charitable bequest you have stated in a trust or will.1

A will is NOT a beneficiary form. When it comes to 401(k)s and IRAs, beneficiary designations are commonly considered first and wills second. If you willed your IRA assets to your son in 2008 but named the man who is now your ex-husband as the beneficiary of your IRA back in 1996, those IRA assets are set up to transfer to your ex-husband in the event of your death. Sometimes beneficiary forms are revised; often they are never revised.1

If a retirement account owner passes away, what steps need to be taken? First, the beneficiary form must be found, either with the IRA or retirement plan custodian (the financial firm overseeing the account) or within the financial records of the person deceased. Beyond that, the financial institution holding the IRA or retirement plan assets should also ask you to supply:

A certified copy of the account owner's death certificate
A notarized affidavit of domicile (a document certifying his or her place of residence at the time of death)

If the named beneficiary is a minor, a birth certificate for that person will be requested. If the beneficiary is a trust, the custodian will want to see a W-9 form and a copy of the trust agreement.2,3,4

If you are named as the primary beneficiary, you usually have four options regardless of what kind of retirement savings account you have inherited:

Open an inherited IRA and transfer or roll over the funds into it.
Roll over or transfer the assets to your own, existing IRA.
Withdraw the assets as a lump sum (liquidate the account, get a check).
Disclaim as much as 100% of the assets, thereby permitting some or all of them to be inherited by a contingent beneficiary

However, these options may be influenced or limited by four factors:

The kind of retirement plan you have inherited.
Whether the named beneficiary is a spouse, non-spouse, trust or estate.
The age at which the account owner passed away.
The resulting tax consequences.

Before you make ANY choice, you should welcome the input of a tax advisor.3,5

What if you are a spousal beneficiary? If that is the case, you may elect to:

Roll over or transfer assets from a traditional IRA, Roth IRA, SEP-IRA or SIMPLE IRA into your own traditional or Roth IRA, or an inherited traditional or Roth IRA
Withdraw the assets as a lump sum
Roll over or transfer qualified retirement plan assets from a 401(k), 403(b), etc. into your own retirement account, or take them as a lump sum
Disclaim up to 100% of the assets within 9 months of the original account owner’s death3,5,8

What if you are a non-spousal beneficiary? If this is so, you may elect to:

Roll over or transfer assets from a traditional IRA, Roth IRA, SEP-IRA, SIMPLE IRA or qualified retirement plan into an Inherited IRA
Withdraw the assets as a lump sum
Disclaim up to 100% of the assets within 9 months of the original account owner’s death
Leave the assets in the plan (sometimes permissible with qualified retirement plans) 3,5

What if a trust, estate or charity is named as the beneficiary? If that is the circumstance, there are three choices:

Transfer assets from a traditional IRA, Roth IRA, SEP-IRA, SIMPLE IRA or qualified retirement plan into an Inherited IRA
Withdraw the assets as a lump sum
Disclaim up to 100% of the assets within 9 months of the original account owner’s death3,5

The next calendar year will be very important. Inheritors of retirement accounts have until September 30 of the year following the original account owner’s death to review and remove beneficiaries, and until December 31 of that year to divide the IRA assets among multiple beneficiaries. Usually, December 31 of the year after the original retirement plan owner’s passing is the deadline for the first RMD (Required Minimum Distribution) from an inherited traditional or Roth IRA.6

Now, how about U.S. Savings Bonds? If you are named as the primary beneficiary of a U.S. Treasury Bond, you have three options:

Redeem it at a financial institution (you will need your personal I.D. for this).
Get the security reissued in your name or the names of multiple beneficiaries. You do this via Treasury Department Form 4000, which you must sign before a certifying officer at a bank (not a notary). Then you send that signed form and a certified copy of the death certificate to a Savings Bond Processing Site.
Do nothing at all, as the primary beneficiary automatically becomes the bond owner when the original bond owner passes away.7

What about savings & checking accounts? Bank accounts are often payable-on-death (POD) assets or “Totten trusts.” All a beneficiary needs to claim the assets is his or her personal identification and a certified copy of the death certificate of the original account holder. There is no need for probate. (Some states limit charities and non-profits from being POD beneficiaries of bank accounts.)7

How about real estate? Lastly, it is worth noting that about a dozen states use transfer-on-death (TOD) deeds for real property. If you live in such a state, you have to go to the county recorder or registrar, usually with a certified copy of the death certificate and a notarized affidavit which informs the recorder or registrar that ownership of the property has changed. If the deed names multiple beneficiaries and some are dead, the surviving beneficiaries must present the recorder or registrar with certified copies of the death certificates of the deceased beneficiaries.7

ARE PEOPLE REALLY RETIRING LATER?

True or false? You may have heard this claim before (or something like it): “Many Americans are being forced to retire later because their savings and investments took a hit in the Great Recession.”

Recently, a big-name economist disputed that belief. In a commentary for Bloomberg, former White House budget director Peter Orszag wrote that some of the statistics don’t seem to back up this conventional wisdom, but perhaps it all depends on which statistics you cite.

A fact that can’t be ignored. In mid-January, a widely reprinted Washington Post article mentioned that since the start of the recession, the population of U.S. workers older than 55 has increased by 12% to 3.1million.1

Examining this Labor Department finding, the Post feature referenced longevity and the loss of traditional pension plans as contributing factors. It presented stories of older workers who didn’t think they could easily retire, and quoted respected commentators such as Alicia Munell, director of the Center for Retirement Research at Boston College, who remarked that “some of these people are just clinging by their fingernails to jobs.”

But is there more to the story? It turns out that Americans were trending toward staying in the workforce longer even before the recession. In 1994, Orszag notes, 43% of Americans aged 60-64 were working; in 2006, it was 51%. Nearly half of 62-year-olds went and claimed Social Security benefits in 1994, but 12 years later, less than 40% of 62-year-olds followed suit.

Orszag mentions another factor that may have kept older employees working during the recession: declining home equity. Put that alongside diminished IRA and 401(k) balances, and there was every reason to stay on the job these last few years.

However, just because older Americans wanted to keep working didn’t mean that they could.

In the 2011 edition of its respected Retirement Confidence Survey, the Employee Benefit Research Institute found that 45% of retirees ended their careers earlier than they wanted to, in many cases due to layoffs and health issues.

The Post article noted that the jobless rate for workers older than 55 was just 3.2% in December 2007 when the downturn began. In December 2011, it was up to 6.2%.

The percentage of employed Americans aged 60-64, which had steadily risen during the 1990s and early 2000s, has remained at roughly 51% for the past five years.

That brings us to Orszag’s central point: “The bottom line is that people’s retirement decisions aren’t always entirely voluntary.”

How about your retirement decision? Do you think you will retire when you want to retire? Are you prepared for retirement financially? A new year is a good time for a new look at the state of your finances and your retirement readiness. With astute planning, you might be able to retire sooner than you think.