Do you have a Vanguard IRA?
More to the point – do you have more than one IRA at Vanguard? About a year ago, in July 2007, Vanguard Group sent 170,000 customers a form letter titled “Change in beneficiary policy will help you simplify your planning.” What it really meant, as reported by Ashlea Ebeling writing for Forbes, is: “Warning! Unless you act, we’re about to change who gets your Individual Retirement Accounts when you die.”
Vanguard decided that customers must use identical beneficiaries for all IRAs of the same type. All your IRAs holding money rolled from employer pension plans count as the same type and must have the same beneficiaries. Traditional IRAs, both pretax and after tax, are a second type. Roth IRAs are a third.
There are all sorts of reasons one might want to have multiple IRAs. One could be for your wife, another for the children of your first marriage. You might want one for each child. One might be payable to a trust, another to your children outright. None of this is allowed anymore at Vanguard. If you have named beneficiaries that are not the same for each account of the same type – it has now been changed. What you designated will not apply. Vanguard has changed your beneficiaries. Isn’t that shocking?
If you had multiple IRAs which beneficiary designation did they pick? Vanguard will apply the newest beneficiary form to all your IRAs of one type. If two forms were submitted at the same time, Vanguard will treat the one it processed later as newer.
If you have Vanguard IRAs you must be in contact with them to see who your named beneficiaries are. You can change the beneficiary, as long as all IRAs of the same type have the same beneficiary.
For many folks, their IRA is the largest asset in their estate. The provisions of a will do not govern who gets the IRA – it goes by its beneficiary designation.
Vanguard’s unilateral action is wreaking havoc with many estate plans. Many financial planners and estate planning attorneys recommend that their clients divide IRAs. For example, since an IRA is an excellent asset to leave to charity (because the charity can receive it free of income and estate tax); it is common to put a part of an IRA in a separate account with a charitable beneficiary. This is important because there are some complex rules and traps to be avoided if a charity is one of a group of beneficiaries.
I thought the policy change to be so misguided and shocking – and it received such bad press – that surely Vanguard would reverse its policy and go back to sanity. But no, here it is a year later, and they are holding fast.
Ebeling’s Forbes article states: “Say you’ve named your older child primary beneficiary of one rollover IRA and your younger child primary beneficiary of another. If you don’t read your mail carefully, or were on vacation or in the hospital when the letter came, and you die without contacting Vanguard, one of your kids could be done out of his IRA inheritance.” When Forbes showed Vanguard’s letter to IRA experts, they were outraged. “This borders on the unconscionable,” fumed Green Bay CPA Robert Keebler. “It’s crazy. I don’t see how they can change the beneficiaries on your accounts without your consent,” said Boston lawyer Natalie Choate.
Dan Caplinger writing for The Motley Fool advises, “Don’t let your broker or fund company have the final word on how you plan your estate. If your provider won’t follow your instructions, make a change and find one that will. You deserve to keep control of who’ll inherit your assets.”
Vanguard doesn’t usually get bad press. Finance reporters really like its low-cost, customer friendly approach. But they got this one wrong. If Vanguard won’t let you name the beneficiaries you want – go elsewhere.