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Beneficiary Designation FAQs

As an account holder of an IRA or a qualified plan, you must designate a beneficiary or beneficiaries in case of death. There are rules that govern beneficiary distributions. Below is a list of common frequently asked questions about this important step.

How does an account holder designate a beneficiary or beneficiaries under Principal Trust Company's trust?

The customer designates a beneficiary on their application. For Qualified Plans where the designated beneficiary is not the spouse but a spouse exists, notarized spousal consent must be provided.

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How would an account holder change a beneficiary or beneficiaries?

An account holder can change the designation by submitting a completed Beneficiary Change Form with notarized signature.

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When is the designation considered valid?

The designation is considered valid after it is received at Principal Trust Company or our agent.

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What if the designation is received after the account holder's death?

A new designation is not valid unless it is received before the account holder's death.

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What if the account holder does not name a beneficiary before they die?

The default beneficiary is the spouse. If there is no spouse, the default is the account holder's estate.

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If an account holder gets divorced will the spouse automatically be replaced as the beneficiary?

No. The account holder must submit a beneficiary change. If this is not done, the ex-spouse will remain as the beneficiary.

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How will the distribution be allocated if the account holder does not list amounts or percentages for the beneficiary(ies)?

The total to be distributed will be split equally among the beneficiaries.

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When the account holder dies after beginning to take Required Minimum Distributions (RMDs), must the beneficiary(ies) continue to take the distributions?

Yes. An RMD based on the account holder's life expectancy must be taken by December 31 of the year of the original account holder's death. If there are multiple beneficiaries, the distribution will be based on the life expectancy of the oldest beneficiary. Subsequent distributions must be taken by December 31 each year.

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After the account holder dies, may the beneficiaries designate their own beneficiary(ies)?

Yes. However, if distributions were already being made to the beneficiary, he/she must continue to the subsequent beneficiary, at least as rapidly as they were being made to the original beneficiary.

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What if the beneficiary is a minor or is incapacitated?

The account will be paid to a legally-appointed guardian.

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Can an account holder name "their will" as their beneficiary?

No.

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Can an account holder name someone other than an individual (such as a charity or foundation) as the beneficiary?

Yes. However, if a beneficiary is not an individual, distributions upon the death of the account holder must be paid out using the five-year rule.

The five-year rule stipulates that the entire account must be distributed by December 31 of the year containing the fifth anniversary of the account holder's death, unless the beneficiary is a spouse and Required Minimum Distributions have not begun. The five-year period begins on the last day of the calendar year in which the death occurred.

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Under what conditions is a trust a valid beneficiary designation for Required Minimum Distribution (RMD) purposes?

The following requirements must be met:

  • The trust must be valid under state law.
  • It must be irrevocable upon death.
  • The beneficiaries of the trust must be identifiable through the trust instrument.
  • Required documentation must be provided to the trustee upon demand.

If the trust meets the requirement, the beneficiaries of the trust will be treated as if they were the beneficiaries of the account.

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According to the RMD regulation, a beneficiary can be removed from the account. What does that mean?

A beneficiary can decide to either reject their share of the account or take a lump sum distribution. This is usually done when there are multiple, non-spouse beneficiaries. The required distributions are then based on the life expectancy of the oldest remaining beneficiary.

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How do you determine life expectancy when calculating distributions?

There are two ways to do so:

  • Recalculated Method - each year the beneficiary refers to the Life Expectancy Tables to determine to life expectancy. (For Spouse beneficiaries only.)
  • Elapsed Year Method - the initial life expectancy of the beneficiary is obtained by referring to the Life Expectancy Tables, reduced by one for each subsequent year. This method can also be referred to as the Non-Recalculation Method, Minus One Method Declining Years Method, or Term Certain Method.

Note: This information should not be construed as providing individual tax or legal advice. Please consult with your own tax advisor or attorney regarding your individual situation.

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