No beneficiary designation for an IRA?

If you have an individual retirement account, do you recall filling out a beneficiary designation form? That’s the document that allows you to direct the IRA custodian to transfer your IRA to people you name in the form. The custodian is the institution that holds your IRA assets for you.

Do you recall reading the custodian’s IRA agreement? If you have a copy in your file (you should), you might want to dust it off and look it over. Here’s why:

In that document, you will find provisions that take over in certain instances, such as if you fail to designate a beneficiary. As I give you two examples, think about how these provisions might affect you.

A major institution that has custody of about 10 million IRAs has the following provision:

“If the (IRA owner) had not by the date of his or her death properly designated a Beneficiary ... or if no designated primary or contingent Beneficiary survives the (IRA owner], the [IRA owner]’s Beneficiary shall be his or her surviving spouse, but if he or she has no surviving spouse, his or her estate.”

This type of provision is not uncommon. It gives the institution the authority to transfer the IRA when the owner dies if there is no beneficiary designation on file. A married IRA owner’s IRA would pass to his or her spouse, which would allow for continued tax deferral. Unlike nonspouse beneficiaries, a surviving spouse has the option of transferring the IRA into his or her own IRA.

What would happen to an IRA owner who is single? An unmarried IRA owner’s IRA would pass to his or her estate under this custodian agreement’s default provision. The result may not be what you want if you would like the IRA to be inherited by a niece, nephew, child or grandchild. If an IRA transfers to an estate, the IRA loses its connection to a person for “stretch” purposes (keep in mind that an IRA is an “individual” retirement account). That is, tax deferral can be lost quickly, a topic for a later column.

Other agreements are more flexible. Check out this one, for example:

“If there is no Beneficiary designation on file with the Custodian, or if no primary or contingent Beneficiaries survive the Participant, the Custodian shall distribute the Account in the following order of preference:

“(i) The Participant’s surviving spouse, if any

“(ii) The Participant’s children, if any, in equal shares per stirpes

“(iii) The Participant’s estate”

I like this provision much more than the first one. It works better for both married and single people who have children or grandchildren. “Per stirpes” comes into play when a child predeceases the IRA owner; the grandchildren (the deceased child’s children) inherit the share the deceased child would have received had he or she been alive when the IRA owner died.

Again, these provisions come into play if your custodian does not have your beneficiary designation on file. I would strongly suggest that you doublecheck by calling your IRA custodian for a copy of what they have on hand. Or you can fill out a new beneficiary designation — just make sure your custodian places the designation on file. Otherwise, the default provision of the custodian agreement will apply. Also, be sure your beneficiary designations are kept in a safe place. Julie Jason, JD, LLM, a personal money manager (Jackson, Grant of Stamford) and author, welcomes your questions/comments (readers@juliejason.com). Her awards include the 2018 Clarion Award, symbolizing excellence in clear, concise communications. Her latest book, a curated collection of Julie’s columns, is “Retire Securely: Insights on Money Management From an AwardWinning Financial Columnist.” To hear Julie speak, visit juliejason.com/events.