Published 3/17/2019 in The Maryland Daily Record
Here we are in March with this sense that 2019 already feels long. Many colleagues have shared that they also feel fatigued at a time of year when many of us are typically in prime time with tax season in full force. The myriad of factors contributing to this drag really vary, from personal changes to complex client issues, to the news cycle and the political environment. It’s not so different at the surface from what is usually going around, yet this year just feels long.
Within my work, we have had a number of very complex client issues related to estate settlement and tax filings. In a 2018 column, I wrote about the necessity for advisers to dial down our assumptions and expectations about what clients know about our work for them. This disparity continues to be an ongoing concern, and much of my time this year has been spent bridging these gaps or working toward repairing them.
Even within the 20-plus years I’ve worked in this profession, I learned something over the past year that I simply had not come across before related to IRA beneficiary designations. The supreme importance of properly naming beneficiaries for retirement accounts is not lost on anyone who has an Individual Retirement Account at a reputable financial institution. During the account owner’s lifetime, this designation can be changed at any time and as many times as the account owner wishes.
Because of the tax benefits and implications associated with this type of an account, there are now commonly used techniques to enhance the benefits of the tax-deferred nature of these accounts. This requires thoughtful assignment of the beneficiary language to achieve this desired outcome.
Another common practice when an account owner has reached age 70½ is to aggregate the required minimum distributions that begin all from one account. Regardless of how many IRAs someone has, the combined balances can be used to calculate the annual amount required to be distributed. This entire amount can be withdrawn from one account rather than the proportionate amount from each respective IRA. The annual process that allows for this type of flexibility simply does not translate to the point in time when the account owner dies.
Considering multiple IRAs at various financial institutions, it made total sense to me that every account would need to have updated IRA beneficiary designations. However, in our practice, a standard account management practice for each client is to have at least a two-account structure – one as a cash reserve account to meet the cash needs of a client and the other accounts designated for the underlying investment execution that remain long term in focus.
Not simple after all
Because we so regularly move funds from the investment accounts into the cash reserve account throughout the lifetime of a client, my thought process was that at the death of a client we would simply consolidate the funds back into the primary account and make the distributions to the beneficiaries from one account. Sounds simple. It turns out not to be in this case.
Years ago, my client and I met with his trust & estate attorney to allow him to plan out the future of his assets and how he wanted things to be handled after his death. His attorney thoughtfully crafted representative plans to fulfill his wishes. Within my office these intentions were memorialized through the IRA beneficiary designation process.
What didn’t happen was the verification that each of the accounts needed to receive this updated language. I always understood the intention was to have the updated language and the primary account had this reflected. I also knew that having multiple accounts was more of an administrative function on our end, and I expected that we would simply consolidate these accounts as needed. In the end, this turned out to be far more complicated than I ever imagined.
After months of working through this issue of having only one account reflect the updated beneficiary language, a major lesson was learned. While we were able to resolve the discrepancy, it wasn’t without meaningful coordination to make sure that this was accomplished.
Upon reflection, it makes total sense. IRA owners often designate different accounts to different people or organizations. Every account must have accurate beneficiaries. There is simply very little room for interpretation after the death of the account owner, and financial institutions are so protective of their role in the process. From our end, we now have a much closer eye on the beneficiary language for every account. Especially as time goes on and life circumstances change, it is critical to have a periodic review of who is designated on these accounts that range from IRAs, 401ks, life insurance – any account where a beneficiary is in play when it comes to distributions at death – to ensure that money ends up going to the right people, place or thing.
—Dorie Fain, founder and CEO of &Wealth