Does a will change a retirement account beneficiary?

Key takeaway

Usually not. A retirement account generally passes to the person named on its beneficiary form, subject to spousal rights and the plan's rules.

Inheriting under a will does not, by itself, make someone a beneficiary designated under a retirement plan or IRA. Start your review with the account's beneficiary designation and the plan's instructions for changing it.

Use the plan's beneficiary change procedure

In Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, the plan required beneficiary designations and changes to follow a particular procedure. The participant's designation complied with that procedure, but his former spouse's waiver did not.

The account was in an ERISA plan, the divorce decree was not a qualified domestic relations order, and the participant had not removed his former spouse as beneficiary. The Supreme Court upheld the administrator's payment to her.

The Court did not hold that the waiver was invalid under ERISA's antialienation provision. It left unresolved whether the estate could recover the benefits from the former spouse after payment.

For your own review, gather the current designation, the instructions for replacing it, and any confirmation of a requested change. Compare the names with the people you intend to benefit.

Spousal rights can limit the choice

Plans subject to the survivor annuity rules must provide a vested participant's benefit as a joint and survivor annuity. If that participant dies before the annuity starting date with a surviving spouse, a preretirement survivor annuity is required.

These rules cover defined benefit plans, money purchase plans subject to funding standards, and other defined contribution plans unless an exception applies. A waiver requires the spouse's written consent, witnessed by a plan representative or notary.

For other defined contribution plans, the exception requires the full vested balance to be payable at death to the surviving spouse, or another beneficiary with the required spousal consent, and no life annuity election.

IRAs are not covered by this employer plan survivor annuity provision. Ask the administrator which requirements apply to your account before requesting a change.

Designated beneficiary. An individual designated by the owner or under the plan is a designated beneficiary for retirement distribution purposes. An estate is not an individual, while a qualifying trust can be looked through to its beneficiaries.

See through trust. A trust named as beneficiary qualifies for looking through to its beneficiaries only if valid under state law, irrevocable or irrevocable at death, with beneficiaries identifiable from the instrument and the documentation requirements met. For an IRA, that documentation need not be provided to the IRA custodian.

Four resources for your beneficiary review

Retirement accounts and beneficiaries. Open this guide to put your beneficiary question in the wider context of retirement account planning. Use it to identify the next account specific questions for your adviser.
Retirement account records and questions checklist. Use this checklist while gathering the designation and plan instructions discussed above. Bring your completed notes to the conversation about any mismatch.
Asset and authority map template. Put each retirement account on one working map so your review has a clear starting point. Keep the account information beside the documents you want your adviser to compare.
Estate planning discussion checklist for owners. Use this to explain who you want to benefit and what concerns prompted your review. It can help turn a disagreement between documents into a focused planning conversation.

A perspective on asking about tax effects

A beneficiary review is also an opportunity to prepare questions about the intended recipient's tax situation. This talk excerpt emphasizes understanding the investor's circumstances before discussing an investment.

"So, you know, having a basic understanding of how your potential investment will affect the investor from a tax standpoint will give you put you miles ahead of other folks, knowing how to improve your investor's tax situation will put you into a league of your own."
From an Investor Advantage talk hosted by Richard C. Wilson

Frequently asked questions

What if no beneficiary designation is effective?

The particular plan's default provisions determine the recipient. In the Kennedy plan, payment went to the estate only when the participant died without either a surviving spouse or an effective beneficiary designation.

That was a provision of that plan, not a universal order of recipients for retirement accounts. Request your own plan's default provision rather than assuming the estate receives the account.

Does divorce automatically remove a former spouse?

Not necessarily. ERISA preemption can prevent a state's automatic revocation upon divorce rule from changing an ERISA plan beneficiary, as the Supreme Court held in Egelhoff v. Egelhoff.

That holding does not establish the result for every IRA or other arrangement.

In Minnesota, for example, divorce revokes a revocable beneficiary designation favoring a former spouse in a governing instrument, unless the instrument, court order, property agreement or retirement plan document provides otherwise.

ERISA rules may control, and other states differ. Include the account type and divorce documents in your review.

Does the ERISA payment analysis apply to every employer plan?

No. ERISA Title I excludes plans meeting the statutory governmental plan definition and plans meeting the church plan definition for which no election under the applicable federal tax provision has been made.

Those exclusions limit the use of the ERISA administrator payment analysis. Confirm the plan's status before applying it.

Sources

Treasury regulation §1.401(a)(9)-4: beneficiary designation under the plan, nonindividual beneficiaries and qualifying trusts.
Treasury regulation §1.408-8: IRA trust documentation exception.
Kennedy v. Plan Administrator for DuPont Savings and Investment Plan: designation procedures, administrator payment, the plan's default and the unresolved claim after payment.
Internal Revenue Code §401(a)(11): employer plan survivor benefits, scope and the defined contribution exception.
Internal Revenue Code §417(a)(2): written, witnessed spousal consent.
Egelhoff v. Egelhoff: ERISA preemption of automatic revocation upon divorce.
Minnesota Statutes §524.2-804: divorce and revocable beneficiary designations, with exceptions.
29 U.S.C. §1003(b): governmental and church plan exclusions, including the church plan election condition.