When it comes to your finances, it is important to have a plan that can be put into action if you become mentally or physically incapacitated or otherwise unable to manage your own affairs. Your retirement account is no exception to this rule - you need to make plans to maintain what you consider the normal operation of your account in the event that you are unable to carry out those normal tasks. Putting a plan in place will help to ensure that decisions made do not go against your preferences. Here we discuss some of the steps you can take to ensure your retirement account continues to be managed properly, by your standards.

Designating a Power of Attorney for Your Retirement Account
Designating a power of attorney (POA) for your retirement account helps to ensure that actions such as providing direction for investments, requesting distributions, making contributions and changing beneficiary designations will continue even when you are unable to provide direction to your plan administrator or IRA custodian. To avoid any confusion or doubt as to the actions that are permitted under the POA, you may want to list all the actions it covers. Financial institutions are more likely to accept a POA for a certain action if the POA clearly indicates that the action is allowed.

Here are a few useful questions to ask and tips to keep in mind:

  • Is the POA durable or non-durable? A durable POA continues to be in effect after the retirement account owner is determined to be legally incompetent. A non-durable POA ceases to be in effect if the retirement account owner is determined to be legally incompetent. A POA that is intended to be durable should include language stating that the POA remains in effect or becomes effective should the retirement account owner become legally incompetent. Excluding such language will generally result in the POA being non-durable.
  • Does the POA clearly state that it covers the retirement account or retirement account transactions? If so, are the types of transactions listed?
  • Is the POA still in effect or has it terminated?
  • Has the financial institution or plan administrator been provided with a copy of the POA? If so, has the institution or administrator acknowledged that the POA satisfies its requirements? Caution: Before implementing a POA for your retirement account, check with your plan administrator or IRA custodian to determine if the POA will be accepted, and whether any limitations apply. For instance, many financial institutions will not accept a POA's instructions to change a beneficiary on a retirement account, and some will accept the request, provided the attorney in fact is not asking that he or she be named the new beneficiary.

    Designating a POA will help to ensure that your person of choice makes appropriate decisions for applicable transactions. If you become mentally or physically incapacitated and you have not prepared a POA, the courts may designate a guardian or conservator to handle your affairs, and this person may not be the person you would have chosen.

    Designating a Beneficiary for Your Retirement Account
    Unlike your other assets, your retirement account and life insurance policies are usually not governed by your will. Instead, the parties who inherit these assets are determined by the beneficiary designations on record at the time of your death. Should you fail to provide a beneficiary designation to your plan administrator or financial institution, your beneficiary will likely be determined according to the default provisions of the plan document. For qualified plans, the default provision is usually your surviving spouse, if any. For IRAs, the default provision is usually your surviving spouse or your estate, with some accounts providing that your children are the beneficiaries if you are not survived by a spouse. To be sure that your assets are passed on to the parties whom you want to receive them, you should provide a designation of beneficiary form to your plan administrator or financial institution. (To learn more, see Who Is The Beneficiary Of Your Account? and Problematic Beneficiary Designations - Part 1 and Part 2.)

    The following are some important points to keep in mind when making your beneficiary designations:

    • Is the designation current - has it been updated for any recent life-changing events, such as divorce, death, remarriage and births?
    • Did your plan administrator or financial institution receive a copy of your designation of beneficiary form? Many financial institutions will not accept a beneficiary designation after the death of the retirement account holder. Therefore, only the designations provided prior to your death would be considered 'in effect' by these financial institutions.
    • If you have a customized beneficiary designation, is it acceptable to your plan administrator or financial institution? When in doubt, ask for a written acknowledgment of receipt and/or acceptability.
    • Are the options available to the beneficiaries consistent with your estate-planning needs? For instance, will your beneficiaries be required to take immediate distributions, or will they be allowed to stretch distributions over the applicable life expectancies?

    Most of what we've discussed here may seem simple. However, bear in mind that the individuals processing your requests are not attorneys or tax/legal experts. Therefore, the simpler the document, the more likely it is to be readily accepted, reducing any reworking and eliminating frustration for all involved. In most cases, financial institutions want to be helpful, but they also want to make sure that they handle your assets correctly.

    If you keep things clear and simple, it will help to ensure that your objectives are fulfilled seamlessly. Be sure to check with your attorney on these matters before making any decisions. Your attorney should also be able to determine whether your legal documents satisfy both legal requirements and your individual planning needs. (For further reading, see Getting Started On Your Estate Plan and Three Documents You Shouldn't Do Without.)