PARTIES OF FIRST PART TRY TO ENSURE DOUGH FOR PARTIES OF THE SECOND: COMPLEX IRA FORMS REQUIRE CUSTOMIZATION

Financial advisers and estate planning lawyers are finding a whole new business in helping people set up retirement plans so that beneficiaries can control the assets instead of mutual fund companies.

One would think that beneficiaries could do what they want with the money. But the way enrollment forms are worded for individual retirement accounts, 401(k) and profit-sharing plans can make it difficult for beneficiaries to limit their tax hit by stretching out payments or converting the accounts into a trust, for instance. It’s also tough for them to transfer the pool of money to a beneficiary of their own choosing.

This is becoming a bigger issue as balances in 401(k) plans, individual retirement accounts and profit-sharing plans swell to enormous sizes. Advisers and lawyers are drawing up customized beneficiary designation forms before their clients set up retirement accounts.

Philadelphia tax lawyer Mervin Wilf recalls a man seeking help because his father’s IRA was bequeathed to his second wife, who planned to pass it on to her children by a previous marriage instead of the deceased’s children. Mr. Wilf, who specializes in setting up custom IRA beneficiary designations, had to tell the son that it was too late to do anything.

The son could have received the proceeds of the IRA after the second wife’s death if the IRA had been set up in a trust, but forms offered by most IRA management companies don’t allow for that.

Mr. Wilf adds that many IRA plans specify that beneficiaries who inherit the accounts after the death of the original owner can take the money out as a lump sum, which subjects them to a second round of estate taxes.

“You have these documents initially designed to take care of $2,000 annual contributions, ” Mr. Wilf says. “These are documents that are essentially being used to funnel millions of dollars. They just aren’t suitable for it.”

Green Bay, Wis., accountant Robert Keebler, a partner with Virchow Krause & Associates LLP, spoke last week with a client whose late wife had different beneficiaries for the $500,000 in her three pension plans, an IRA, a 401(k) and a profit-sharing plan.

The plans should have been put into a credit shelter trust, which eventually could have allowed her daughter to inherit the money without paying estate taxes, Mr. Keebler says.

“A customized beneficiary form would have allowed him to do all that,” says the accountant.

Mineola, N.Y., lawyer Victor Finmann consulted last week with a 78-year-old client who had withdrawn, and paid taxes on, more of his $70,000 IRA money over the last eight years using standard forms than he would have had Mr. Finmann set up special documentation for him to make the withdrawals.

Earlier this year Eric Donner, a financial planner for 15 years, started Retirement Distribution Strategies Inc. in Metuchen, N.J.

Mr. Donner, Mr. Finmann and Mr. Keebler train financial advisers to use their model “retirement asset will” to govern how their clients’ retirement assets will be distributed.

“This is typically the largest asset that people have, and there is no document, like a will or a trust, that efficiently transfers this wealth to future generations,” Mr. Donner says. IRA owners typically “make a 14-second decision by checking off the beneficiary box on an IRA application.”

For an initial fee of $5,500 and annual membership fees of $2,250 thereafter, planners who train at Retirement Distribution Strategies have access to training, documentation for setting up beneficiary designations, software to assess clients’ needs and marketing materials.

Patricia McCauley, vice president in the legal department at Baltimore’s T. Rowe Price Associates Inc., says the problem that beneficiaries face without customized agreements is that to retain the tax benefit of stretching out payments, IRAs must stay in the name of the original owner after his death.

“The legal problem that you run into if you want to move it to another institution is how can a decedent open an account. Usually the IRA owner is the one who has to sign the forms, and the IRA owner is dead.”

fund firms make amends

Mutual fund companies say they are responding to investors’ needs. Boston-based Fidelity Investments says that next year it will start allowing beneficiaries to designate their own beneficiary, says Stephen Mitchell, senior vice president for product management and development.

Fidelity accepts customized IRA agreements for trusts or allows lengthy directions laying out how the funds are to be distributed to initial and secondary heirs, Mr. Mitchell says, as long as the customers have more than $200,000 invested with Fidelity. “Generally that’s where we see most of the requests,” he says.

John Barth, principal of the retirement services group at Malvern, Pa.-based Vanguard Group, says the company does not allow customized IRA agreements, but accounts can be set up in trusts. The company has included most options used by estate planning lawyers on its forms for several years, he explains. “The options that we allow allow customization,” he says.